South-Western College Publishing - Economics  
Hey, Hon! Get me a Happy Meal While You Get One For the Kids!
Subject McDonald's Has a New Product
Topic Supply and Demand; Monopolistic Competition, Product Markets, Utility and Consumer Choice
Key Words

New Product, Differentiation; Fast Food Industry

News Story

In response to changing consumer trends toward healthier eating, McDonald's announced that on May 6, 2004, it would roll out Adult Happy Meals, called "Go Active!" meals, in all 13,600 U.S. domestic McDonald's restaurants. Selling for approximately $4.99 each, the meals include a salad, bottled water, and a pedometer. In addition, McDonald's is phasing out its Super-Size quantities as well as introducing all-white-meat chicken in its McNuggets. Soon McDonald's plans to add fresh fruit and juice options in its Happy Meals for children.

While McDonald's is not altering its principle hamburger-and-fries menu, it is responding to society's greater concern over health, and in addition to adding the healthier options, McDonald's restaurants are offering pamphlets advising consumers how to alter the fat, caloric, and/ or carbohydrate intake as customers order off of its menu. This is also part of a larger trend in the fast-food industry. Other chains, such as Hardee's, has introduced a low-carb version of its "Thickburger."


(Updated June, 2004)

Questions
1.

As society becomes more diet-conscious, what would you expect to happen to the equilibrium quantity of Big Macs (McDonald's signature hamburger) and the price of Big Macs? Use a graph of supply and demand to demonstrate your answer.

2. What would you expect to happen to revenues brought in by Hardees, who introduced its low-carb alternative prior to McDonalds' initiative to provide healthy alternatives? How do these actions illustrate the fact that these firms operate in a monopolistically competitive market?
3. Assuming that this pro-health initiative succeeds, what happens to the opportunity cost of additional lawsuits brought by obese individuals blaming McDonald's for their health issues? Why? Explain carefully, using economic analysis.
Source Dave Carpenter. "McDonald's Adds Healthy Adult Happy Meals." Associated Press. 16 April 2004.

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