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Last week, Wally's Burgers, Inc
Last week, Wally's Burgers, Inc. reduced the average price on the 1/2-pound Papa burger by 1%. In response, sales jumped by 2%.
a) Calculate the point price elasticity of demand for Papa burgers.
b) Calculate the optimal price for Papa burgers if the marginal cost is $1 per unit.
Expert Solution
a).
Given that;
The elasticity of demand is calculated as:
The elasticity of demand is 2.
b).
The optimal price can be solved using the Lerner's index:
Solve for the Lerner's index:
Now solve for the price given that the marginal cost is $1:
The optimal price is $1.5.
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