Estimation and Analysis of Demand for Fast Food Meals

You work for PriceWatermanCoopers 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. 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.

TABLE 1: Weekly Sales Data for Combination 1 Meals (1998)

week Q P A week Q P A

1 51,345 2.78 4,280 27 78,953 2.27 21,225

2 50,337 2.35 3,875 28 52,875 3.78 7,580

3 86,732 3.22 12,360 29 81,263 3.95 4,175

4 118,117 1.85 19,250 30 67,260 3.52 4,365

5 48,024 2.65 6,450 31 83,323 3.45 12,250

6 97,375 2.95 8,750 32 68,322 3.92 11,850

7 75,751 2.86 9,600 33 71,925 4.05 14,360

8 78,797 3.35 9,600 34 29,372 4.01 9,540

9 59,856 3.45 9,600 35 21,710 3.68 7,250

10 23,696 3.25 6,250 36 37,833 3.62 4,280

11 61,385 3.21 4,780 37 41,154 3.57 13,800

12 63,750 3.02 6,770 38 50,925 3.65 15,300

13 60,996 3.16 6,325 39 57,657 3.89 5,250

14 84,276 2.95 9,655 40 52,036 3.86 7,650

15 54,222 2.65 10,450 41 58,677 3.95 6,650

16 58,131 3.24 9,750 42 73,902 3.91 9,850

17 55,398 3.55 11,500 43 55,327 3.88 8,350

18 69,943 3.75 8,975 44 16,262 4.12 10,250

19 79,785 3.85 8,975 45 38,348 3.94 16,450

20 38,892 3.76 6,755 46 29,810 4.15 13,200

21 43,240 3.65 5,500 47 69,613 4.12 14,600

22 52,078 3.58 4,365 48 45,822 4.16 13,250

23 11,321 3.78 9,525 49 43,207 4.00 18,450

24 73,113 3.75 18,600 50 81,998 3.93 16,500

25 79,988 3.22 14,450 51 46,756 3.89 6,500

26 98,311 3.42 15,500 52 34,592 3.83 5,650

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. Should you use the ordinary least-squares (OLS) method or the two-stage least-squares method

(2SLS) method for estimating industry demand for rutabagas? Explain briefly.

c. Using statistical software, estimate the parameters of the empirical demand function specified in

part a. Write your estimated industry demand equation for rutabagas.

d. Evaluate your regression results by examining signs of parameters, p-values (or t-ratios), and the

R2.

e. Discuss how the estimation of demand might be improved.

f. Using your estimated demand equation, calculate an own-price elasticity and an advertising

elasticity. Compute the elasticity values at the sample mean values of the data in Table 1.

Discuss, in quantitative terms, the meaning of each elasticity.

g. 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 Combination 1 meals do you predict will be sold each week?

h. 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.