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# Maximizing Revenue and Advertising Expenditure

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McBurger hires you as a consultant for advice on its best strategy. You estimate monthly demand for its burgers to be:
Qd = 26,000 - 10,000P + 4,000Pc -.8Y +0.5A
Where the independent variables are respectively: P, price of McBurger's burgers, PC, price of competitors' burgers, Y, per capita income, and A, McBurger's advertising budget. You observe that competitors have, on average, priced their burgers at \$3.50, while McBurger charges \$2.50.Per capita income level in the store's geographic market is \$15,000.McBurger's advertising expenditure is \$20,000 per month. McBurger currently sells 13,000 burgers/month.
1. How much revenue does McBurger currently earn based on the information above?
2. Is McBurger maximizing its revenues under current conditions? [Grading here is based solely on your calculations.]
3. Based on the data given, McBurger should _______________ its advertising expenditure.
b) Lower
c) Not change
d) We cannot say
4. What advice can you offer McBurger, based on the above information? [4].

#### Solution Preview

McBurger hires you as a consultant to advice on its best strategy. You estimate monthly demand for its burgers to be:
Qd = 26,000 - 10,000P + 4,000Pc -.8Y +0.5A
Where the independent variables are respectively: P, price of McBurger's burgers, PC, price of competitors' burgers, Y, per capita income, and A, McBurger's advertising budget. You observe that competitors have, on average, priced their burgers at \$3.50, while McBurger charges \$2.50.Per capita income level in the store's geographic market is \$15,000.McBurger's advertising ...

#### Solution Summary

The solution assists with maximizing revenue and advertising expenditure.

\$2.19

## Maximizing Revenue and Determining Demand

Shoes For Less (SFL) hires you to determine the demand for their shoes, and you estimate this to be:

Qd = 32,000 - 1200P + 600Pc + 1.2Y + 0.06A

where the independent variables are respectively: price of SFL's shoes, price of competitors' shoes, per capita income (in \$) and advertising (in \$) by SFL. You observe that competitors have, on average, priced their shoes at \$40, while SFL charges \$35. Per capita income level in the store's geographic market averages \$25,000. SLF's advertising expenditure is \$550,000 per month.

i) Explain clearly to your client what each of the coefficients means.

ii) Should SFL expand to wealthier areas?

iii) What should SFL do to maximize revenue?

iv) Should SFL increase its advertising expenditure?

v) A prior consultant had originally estimated the demand for SFL's shoes, and obtained:

Qd = 50,000 - 500P + 100Pc + 0.1Y

Explain the difference in the results between your results and those of the original consultant.

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