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Economics: Elasticity for Kwikmeal Co.

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KWIKMEAL
After you complete your MBA, you decide to open a restaurant, named KWIKMEAL. KWIKMEAL is a fast food restaurant with a very limited menu. It serves only a steak sandwich on a whole-wheat roll plus a salad with any beverage of the customer's choice. Normally the sandwich, salad and beverage meal sells for \$12.00 and the average number of meals sold per month is 7,000.

However, KWIKMEAL would like to increase its volume, so this month it cut the price to \$10.00. With the price cut the sales volume of meals increased to 8,000.

QUESTION SET A
1. What is KWIKMEAL's elasticity of demand?
2. Is demand elastic, inelastic, or neither?
3. What does elastic, inelastic, or neither tells us about the elasticity of demand?
4. Why does this matter?
5. Have KWIKMEAL's profits increased or decreased because of the price cut?
6. by how much?
7. Was the price cut a success or failure?
8. What price should KWIKMEAL charge next month and explain why you chose the price? \$10.00 or \$12.00

QUESTION SET B
KWIKMEAL would be willing to sell this many meals per month 10,000 provided that the average price per meal is \$14.00

1. What is KWIKMEAL's elasticity of supply?
2. What number of meals is KWIKMEAL likely to sell at a price per meal of \$14.00?
3. Should KWIKMEAL change its price per meal to \$14.00? Why or why not?

QUESTION SET C
1. Airlines charge lower fares to flyers who make a Saturday night stopover, or who make flight reservations at least two weeks in advance. They charge even lower fares to standby passengers. Explain how these pricing policies relate to elasticity of demand.

2. Some stores give senior discounts and student discounts. Do these pricing policies relate to elasticity of demand in the same way that that the airline pricing policies above do?

Explain why they do or do not.

Solution Preview

KWIKMEAL
After you complete your MBA, you decide to open a restaurant, named KWIKMEAL. KWIKMEAL is a fast food restaurant with a very limited menu. It serves only a steak sandwich on a whole-wheat roll plus a salad with any beverage of the customer's choice. Normally the sandwich, salad and beverage meal sells for \$12.00 and the average number of meals sold per month is 7,000.

However, KWIKMEAL would like to increase its volume, so this month it cut the price to \$10.00. With the price cut the sales volume of meals increased to 8,000.

QUESTION SET A

1. What is KWIKMEAL's elasticity of demand?
2. Is demand elastic, inelastic, or neither?
3. What does elastic, inelastic, or neither tells us about the elasticity of demand?
4. Why does this matter?
5. Have KWIKMEAL's profits increased or decreased because of the price cut?
6. by how much?
7. Was the price cut a success or failure?
8. What price should KWIKMEAL charge next month and explain why you chose the price? \$10.00 or \$12.00

TUTORIAL
1.
Price elasticity of demand is the expression of the effects, on demand, for every change in output volume.

Demand Old New %Change
Price \$12.00 \$10.00 -16.7%
Output 7000 8000 14.3%
Price elasticity of demand -0.86

2.
Elasticity measures the effects on demand for every change in price. The value, of elastic demand, can range from a positive to negative value. ...

Solution Summary

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The solution is clear and concise.

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