A cafe catering for staff in a large corporation offers steak sandwiches and hamburgers as part of its menu.
a) Recently corporation staff were awarded a 7.5% wage rise. Since then the cafe manager has noticed that average daily sales of steak sandwiches increased from 54 to 60 and average daily sales of hamburgers increased from 88 to 93. Specify and calculate the elasticities that the cafe manager can use to explain these relationships. State whether steak sandwiches are a normal or inferior good. State whether hamburgers are a normal or inferior good. Explain your answers.
b) The cafe manager estimates that daily demand for steak sandwiches is represented by
Q = 121.67 – 6.67P where:
P = price per steak sandwich in dollars
Q = number of steak sandwiches sold per day.
Current average daily sales of steak sandwiches are 60. What price is the cafe currently charging for steak sandwiches?
c) The cafe manager notices that a nearby corner store is charging $8.50 per steak sandwich, and is contemplating whether to match the price. Would the cafe lose revenue on steak sandwich sales if it charged $8.50? Justify your conclusion based upon your estimate of the own-price elasticity of demand. Interpret the value and meaning of this elasticity (use the mid-point method to calculate the own-price elasticity of demand).
d) The cafe manager estimates that daily sales of hamburgers would decrease by 11.82% if the price of steak sandwiches was reduced to $8.50 Specify and calculate the elasticity that the cafe manager can use to explain this relationship between the price of steak sandwiches and hamburger sales. Interpret the value and meaning of this elasticity (use the mid-point method to calculate the elasticity).
e) Using the information from parts a), b), c) and d) of this question, provide a recommendation as to whether the cafe should reduce the price of a steak sandwich from $9.25 to $8.50 to increase total revenue? Use a price for hamburgers of $7.00 each (assume the supply of hamburgers is perfectly price elastic).