4. Joe\'s Tacos is considering a price decrease on the Super Taco, which current

Question

4. Joe's Tacos is considering a price decrease on the Super Taco, which currently sells for a price of $6.00. Joe, the owner of Super Taco, has historical sales info from recent price changes. Joe is certain no other demand factors, such as compeitor prices or consumer income, have significantly changed.

Price per taco Sales (weekly)
$5.50 300
$5.00 330
$4.50 360
$4.00 420

a. Compute the price elasticity of demand for tacos, between $6.00 and $6.25 (use the elasticity estimator formula).
b. Compute the price elasticity of demand for burritos, between $5.75 and $6.00 (use the elasticity estimator formula).
c. If the current price is $6.00, and Joe is considering a price decrease of 3.2%, what can you project for a percent change in weekly taco demand (use your elasticity info)?

Explanation / Answer

To determine our elasticities we use the formula Ed=change in quantity demanded/change in price

A. (6.25-6.00)/(240-255)=-0.0163 or -1.63%

B. (6.00-5.75)/(270-255)=-0.0163 or -1.63%

C. Since the good is inelastic (slightly) this decrease in price will increase the quantity demanded but the income effect does no outweigh substitution effect. In this case, thier profit will go down but only slightly. The best desicion would be to increase price however only slightly. This would increase their total profit.

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