Workshop1.4,smith,cody

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Indiana Wesleyan University, Marion *

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Economics

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Jan 9, 2024

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1. We are perplexed with the outcome of certain price changes at our restaurants. Prior to the pandemic, we sold our Mexican combo, consisting of one beef or chicken taco, one beef or chicken burrito, and one small cup of refried beans for $5.95. At that time, our average shop was selling 600 Mexican combos each week. Once the pandemic hit, our commodity inputs rose in price as did the cost of our labor. We hesitantly raised the price to $6.95, anticipating a major reduction in the weekly quantity of demand. To our amazement, average sales per store only declined by 15 combos per week. Please calculate the coefficient of price elasticity of the combo meal using the Midpoints Formula. (600-585) 15 (6.95-5.95) 1 2.53 (600+585)/2 592.5 (6.95+5.95)/2 6.45 15.5 .16 2. As a budding economist, what can you conclude about the price elasticity of our combo meals? Did our combo meals prove to be elastic or inelastic in nature? Explain. The combo meals concluded to be inelastic. Despite the price change, the number of meals sold did not drastically change. Therefore, the product is inelastic. This could be due to lack of substitutes in the area, branding, or a loyal customer base. 3. Senior management has directed shop managers to listen very closely to customers as it relates to this and other price changes at the shop. Without exception, our customers enjoy our products so much, they often state that even after the increase,

“they would purchase the combo meals at one dollar more, without hesitation.” What does this information infer to you relative to the “pricing power” we have with our combo meals? What does this infer in terms of the combo’s “consumer surplus?” Pricing power is the ability of a company to raise prices while only losing a small amount of market demand based on that price increase. The company has good pricing power due to the business increasing the price of their meal and not losing the consumer base to another restaurant. Consumer surplus occurs when consumers are paying less for a product or service that they would be willing to pay more for. This is a classic example of a consumer surplus. 4. Management is stunned by their consumers’ lack of price responsiveness to the combo meals. Understanding that our reduction in sales has been minimal, and the fact that consumers continue to speak so highly of the combo meals, does this suggest that Antonio’s might consider another price increase to the $7.25 to $7.75 range? Explain your rationale for your conclusion on future pricing. Another price increase is certainly manageable. The company currently has a consumer surplus therefore the business could increase pricing and only lose a marginal amount of business from the price increase. The increase in profit from the upturn in pricing would outweigh the marginal loss of consumer business due to the inflated price of the meal. In my opinion another price increase would be ideal for this business.

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