The Burrito Barn is considering a price reduction on the Firegut Burrito. Giusep

Question

The Burrito Barn is considering a price reduction on the Firegut Burrito. Giuseppe, the proprietor of Burrito Barn, has recorded sales data at different price levels over the last year. He is quite confident that no other demand factors, such as consumer income or competitor pricing, have significantly changed during this time period.

Price per Burrito Weekly Sales
$6.25 305
$6.00 321
$5.75 348
$5.50 392

a. Is burrito demand more elastic in the $6.25-$6.00 range or in the $6-$5.75 price range? Justify your answer using the price elasticity estimator for each price range.
b. If the current price is $6.20 and the owner is considering a price decrease of 2.5 percent, what can you project for a percent change in weekly burrito revenue?

Explanation / Answer

A. The demand for the burrito is more elastic in the 6-5.75 range because there is a much larger increase in demand given the .25 decrease in price. B. First we know the price will decrease from 6.2 to 6.2*(1-.025)=6.045. Additionally we know the formula for elasticiy is the change in price/change in demand=E Next plug in information (6.2-6.045)/x=.025 solve for x .155=.025x .155/.025=x x=6.2 Therefore we know burrito revenue will decrease by 6.2%

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