The Impact of Price Changes on Burger Demand
What is the relationship between the price of McDonald's burgers and the demand for Burger King burgers?
According to the data, how will the demand for Burger King burgers be affected if McDonald's increases the price of its burgers by 10%?
Answer:
The relationship between the price of McDonald's burgers and the demand for Burger King burgers is measured by the cross-price elasticity of demand. In this case, with a cross-price elasticity of 0.8, we can determine how the demand for Burger King burgers will respond to a 10% increase in the price of McDonald's burgers.
When the cross-price elasticity between demand for Burger King burgers and the price of McDonald's burgers is 0.8, it indicates that these two products are slightly substitutable. Therefore, a 10% increase in the price of McDonald's burgers will result in an 8% increase in the demand for Burger King burgers.
This means that consumers view the two burger brands as somewhat interchangeable, and when the price of one brand increases, they are inclined to switch to the other brand that offers better value for money.
Understanding the cross-price elasticity of demand is crucial for businesses to anticipate how changing prices in one product will impact the demand for another product in the market. By analyzing these relationships, companies can adjust their pricing strategies to stay competitive and retain their customer base.