| University | RMIT University (RMIT) |
| Subject | ECON1025: Prices and Markets |
Question 1
Mcdonald’s, a big burger joint, is charging $5 for its very famous Big Mac hamburger and sells around 20 million Big Mac in a year in Singapore.
- Suppose Mcdonald’s increases the price of its Big Mac to $6 and still manages to sell the same quantity as the Big Mac. How much revenue will Mcdonald’s gain? What can you infer about the price elasticity of demand (PED) for Mcdonald’s Big Mac? Assume in an alternative scenario, the increase in the price of Big Mac to $ 6 reduces its quantity sold to 18 million. How much revenue will Mcdonald’s gain now? What can you conclude about the PED now?
- Given the two scenarios presented in part a, which one do you think is more likely and why? Present evidence in 100 words or less to support your prediction
- Suppose Mcdonald’s Big Mac and movie tickets have a negative cross-price elasticity of 1.5. What does this number tell us about the relationship between the Big Mac and movie tickets? Suppose, The Golden Village (GV), Singapore’s leading cinema exhibitor, decides to increase the price of its movie tickets by 10%. How will this development affect McDonald’s pricing decisions as indicated in part (a)? Discuss both scenarios.
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