Suppose you work for Five Guys Management is considering a 5% price increase across the board...
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Suppose you work for Five Guys Management is considering a 5% price increase across the board on all menu items. Explain to me in detail how you could rigorously estimate the impact of the 5% price increase on expected sales. (hint: think about methods for estimating demand. After determining the impact of price increase on sales, what must be true about demand in order for you to advise management that it would be profitable to actually implement the 5% price increase. Justify your answer. (Hint: Think about price elasticity)
Homework Answers
Effect of price on sales and total revenue depends upon the price elasticity of demand.
When demand is elastic, an increase in price by 5% would reduce quantity demanded by more than 5%, leading to a fall in total revenue
When demand is Inelastic, an increase in the price by 5% would reduce quantity demanded by less than 5%, leading to an increase in total revenue
In order for it be profitable for management to increase prices, it is required that demand be inelastic in nature, because only then would total revenue Increase.
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