A restaurant/bar is analyzing its pricing of beer. It has determined that the price elasticity of demand
Question:
A restaurant/bar is analyzing its pricing of beer. It has determined that the price elasticity of demand for beer is ?0.8; the cross-price elasticity for wine with respect to the price of beer is 0.9; the cross-price elasticity for appetizers is -1.4; and the cross-price elasticity for entrees is -2.2. The current average price of a beer at this bar is $4.50, and the restaurant sells 250 pints of beer a night. The price of wine averages $8 a glass, and on a typical night 40 glasses of wine are purchased. An appetizer is priced at an average price of $6, and an entree costs $12 on average. The average number of appetizers and entrees sold per night is 70 and 25, respectively. The marginal cost of a pint of beer is $2; an additional glass of wine sold increases costs by $5; an appetizer increases costs by $4; and an entree has a marginal cost of $7. The restaurant is considering lowering the price of beer to $4.
What is the restaurant's profit (prior to the price change)?