Summary of the case:
You work for Price Waterman Coopers as a market analyst. PWC has been hired by the owner of
two Burger King restaurants located in a suburban Atlanta market area to study the demand for its
basic hamburger meal package–referred to as “Combination 1" on its menus. The two restaurants face
competition in the Atlanta suburb from five other hamburger restaurants (three MacDonald’s and two
Wendy’s restaurants) and three other restaurants serving “drive-through” fast food (a Taco Bell, a
Kentucky Fried Chicken, and a small family-owned Chinese restaurant).
The owner of the two Burger King restaurants provides PWC with the data shown in Table 1 (Table 1 is
in a separate excel file). Q is the total number of Combination 1 meals sold at both locations during each
week in 1998. P is the average price charged for a Combination 1 meal at the two locations. [Prices are
identical at the two Burger King locations.] Every week the Burger King owner advertises special price
offers at its two restaurants exclusively in daily newspaper advertisements. A is the dollar amount spent
on newspaper ads for each week in 1998. The owner could not provide PWC with data on prices charged
by other competing restaurants during 1998. For the one-year time period of the study, household income
and population in the suburb did not change enough to warrant inclusion in the demand analysis.
a) Using the data in Table 1, specify a linear functional form for the demand for Combination 1
meals, and run a regression to estimate the demand for Combo 1 meals.
b) Using statistical software, estimate the parameters of the empirical demand function specified in
part a. Write your estimated demand equation for Combination 1 meals.
c) Evaluate your regression results by examining signs of parameters, p-values (or t-values), and R-
d) Discuss how you can improve the overall fit of the estimated regression equation to the actual
e) Using your estimated demand equation, calculate the own-price elasticity and the advertising
Elasticity at the sample mean values of the data in Table 1. Discuss, in quantitative terms, the
meaning of each elasticity.
f) If the owner plans to charge a price of $4.15 for a Combination 1 meal and spend $18,000 per
week on advertising, how many Combinations 1 meals do you predict will be sold each week?
g) If the owner spends $18,000 per week on advertising, write the equation for the inverse demand
function. Then, calculate the demand price for 50,000 Combination 1 meals.
h) This is a continuation on part g). What is your suggestion on the owner’s pricing strategy if he
tells you that his goal is to maximize revenue? Specifically, do you think the owner should
continue to charge the current price or increase/decrease the current price?
|Due By (Pacific Time)||10/14/2013 04:00 pm|
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