CONSULTING PROJECT

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 packagereferred to as Combination 1" on its menus. The two restaurants face
competition in the Atlanta suburb from five other hamburger restaurants (three MacDonalds and two
Wendys 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
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

Q
51,345
50,337
86,732
118,117
48,024
97,375
75,751
78,797
59,856
23,696
61,385
63,750
60,996
84,276
54,222
58,131
55,398
69,943
79,785
38,892
43,240
52,078
11,321
73,113
79,988
98,311

P
2.78
2.35
3.22
1.85
2.65
2.95
2.86
3.35
3.45
3.25
3.21
3.02
3.16
2.95
2.65
3.24
3.55
3.75
3.85
3.76
3.65
3.58
3.78
3.75
3.22
3.42

A
4,280
3,875
12,360
19,250
6,450
8,750
9,600
9,600
9,600
6,250
4,780
6,770
6,325
9,655
10,450
9,750
11,500
8,975
8,975
6,755
5,500
4,365
9,525
18,600
14,450
15,500

week
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52

Q
78,953
52,875
81,263
67,260
83,323
68,322
71,925
29,372
21,710
37,833
41,154
50,925
57,657
52,036
58,677
73,902
55,327
16,262
38,348
29,810
69,613
45,822
43,207
81,998
46,756
34,592

P
2.27
3.78
3.95
3.52
3.45
3.92
4.05
4.01
3.68
3.62
3.57
3.65
3.89
3.86
3.95
3.91
3.88
4.12
3.94
4.15
4.12
4.16
4.00
3.93
3.89
3.83

A
21,225
7,580
4,175
4,365
12,250
11,850
14,360
9,540
7,250
4,280
13,800
15,300
5,250
7,650
6,650
9,850
8,350
10,250
16,450
13,200
14,600
13,250
18,450
16,500
6,500
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.