Management of Mr. Taco has completed a study of weekly demand for its “old fashioned tacos” in 23 regional markets. The study revealed the following demand equation: where Q is the number of tacos sold per store per week and P is the price of its own “old fashioned tacos” . A is the level of local advertising expenditure, pop is the local population and Pc is the average taco price of local competitors. For the typical Mr. Taco outlet, P =$1.50, A = $1000, pop = 40 and Pc = $1.
(a) Estimate the weekly sales for the typical Mr. Taco outlet.
(b) Calculate the price elasticity of demand for Mr. Taco’s “old fashioned tacos”. Also calculate the advertising elasticity and the elasticity of demand with respect to the competitors’ price. Should Mr. Taco raise its taco price? Explain.