Mcdonald’s, a big burger joint, is charging $6 for its very famous Big Mac hamburger and selling around 20 million Big Mac in a year in Australia.
Suppose Mcdonald’s increases the price of its Big Mac to $6.50. Consequently, quantity sold of the Big Mac falls to 17 million. How much revenue will Mcdonald’s gain? What can you infer about the price elasticity of demand (PED) for Mcdonald’s Big Mac? Assume in an alternative scenario, the increase in the price of Big Mac to $ 6.5 reduces its quantity sold to 19 million. How much revenue will Mcdonald’s gain now? What can you conclude about the PED now?
Given the two scenarios presented in part a, which one do you think is more likely and why? Present evidence in 100 words or less to support your prediction.
Suppose Mcdonals’s Big Mac and movie tickets have negative cross price elasticity of - 0.8. What does this number tell us on the relationship between the Big Mac and movie tickets? Suppose, The Village Cinemas, Australia’s leading cinema exhibitor, decides to increase the price of its movie tickets by 10%. How will this development affect McDonald’s pricing decisions as indicated in part (a)? Discuss both the scenarios (as presented in part (a)) in 200 or less words.
