Suppose that if a local McDonald's restaurant reduces the price of a Big Mac from $4.00 to $3.25, the number of Big Macs it sells per day will increase from 4 to 5. Explain the output effect and the price effect resulting from this change. Using a graph,
illustrate both the loss in revenue from selling each of the first 4 Big Macs for $0.75 less and the additional revenue from selling 1 more Big Mac. What is the total change in revenue received which results from this price decrease?
What will be an ideal response?
The 1 extra Big Mac sold is the output effect. The $0.75 cents less it receives for each Big Mac sold at the lower price is the price effect. The total change in revenue resulting from the price decrease is $3.25 - $3.00 = $0.25.
You might also like to view...
The table above shows sales of the firms in the pet food industry. The Herfindahl-Hirschman Index in the industry is
A) 1260. B) 1443. C) 1100. D) 1588.
Which of the following statements about cost curves is always true?
a. ATC decreases as output increases. b. AFC increases as output increases. c. AFC lies above AVC. d. ATC lies above AVC. e. MC lies below ATC.
Considering this graph, which of the following scenarios would most likely happen?
a. Gunnar decides not to enter the market because it has zero economic profits.
b. Freyja decides to stay in the market because of its high potential for short-term profits.
c. Dagur decides to exit the market because of its steady losses.
d. Birta decides to enter to market because its profits are consistently high.
If you believe that all workers should be paid the same, you believe in the
A. benefits standard. B. productivity standard. C. comparative worth principle. D. egalitarian principle.