SECTION E-CASE STUDY (18 marks) How KFC makes you forget to think like an economist (Based on a true story) Recently, af

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Section E Case Study 18 Marks How Kfc Makes You Forget To Think Like An Economist Based On A True Story Recently Af 1 (90.82 KiB) Viewed 38 times

SECTION E-CASE STUDY (18 marks) How KFC makes you forget to think like an economist (Based on a true story) Recently, after attending a late lecture, Tom, a Microeconomics student at ANU College, was very hungry. It was Tuesday and he remembered that KFC was offering a '9 pieces of chicken for $9.95' special. A great 'Not to be Missed' deal - as it was way below the usual price! Tom drove to KFC to buy this special deal. However, on arrival there was a long queue of people waiting for their order, and when he went to the counter to order his meal, the server said, "Sure - but there's an hour wait for orders". Being an economist, Tom quickly thought about all his alternative options. The first option was going to the supermarket next door, buying some chicken and frying it at home, but that would take at least an hour, not including the cleaning up afterwards, and would not be as delicious as KFC. The second option was to walk to McDonalds nearby, which he preferred to the first option, but he was not craving McDonalds - he was wanted KFC, so he decided to wait. It actually took 2 hours for Tom to be served, by which time he was almost dead from starvation. He managed to muster enough energy to drive home and, when he reached there, he was so hungry that he began eating like crazy. After the fourth piece of chicken, he realized that he was totally full. However, he decided to continue eating. After the fifth piece, he started to feel sick, yet he continued eating. He had 3 more pieces of chicken left, and because his fridge was broken, he had to decide whether to finish the chicken or to throw it away. Although he was too full to eat anymore, he thought it would be a waste of money to just throw it away, so he decided to eat the remaining pieces. After this, Tom felt truly sick and didn't sleep well. In the morning, he didn't feel like going to College. However, because he loved his Microeconomics lessons so much, he decided to attend lecture even though he was unwell. And because he did, he passed his Microeconomics test! (Disclaimer: Unfortunately, many chickens were killed in the writing of this story) Required: 1. What situation is created when a company sells a product below the equilibrium price? (2 marks) Marks /2 2. If $9.95 is a 20% decrease on KFC's usual price for 9 pieces of chicken and results in the quantity demanded increasing by 45%, what can you say about the price elasticity of demand for this product? Provide reasons. (3 marks) Marks 13 3. What was Tom's opportunity cost of choosing to eat KFC? Did Tom consider all the costs incurred before deciding on KFC? (3 marks) Marks 13 4. Briefly explain the concept of marginal thinking and, using this concept, explain when Tom should have stopped eating his KFC meal. (5 marks) Marks 15 5. Explain the concept of sunk costs. What is an example of a sunk cost in the story? What do economists believe about how sunk costs should affect future decisions? Did Tom apply this in the story? (5 marks) 15 Marks