Think of another good that you have purchased recently). Be specific (e.g. is it

Question

Think of another good that you have purchased recently). Be specific (e.g. is it breakfast cereal in general or Cheerios cereal specifically). If the price of this item increases, how would this affect the quantity of the good that you consume? Is the Demand for this good Price elastic or Price inelastic? Justify your classification by talking about the determinants of elasticity as they apply to this product. Say price is on the rise for this product and you are the manager of a store, would you be thrilled to be selling this product? Under what circumstances would you want to own a business that sells this product? In other words, how does an increase in price for this good affect your Total Revenue? Using specific examples, relate the concepts of Cross Elasticity and Income Elasticity to this product.

Explanation / Answer

I recently purchased a watermelon. I always buy one when they come in season regardless of price really. They are more expensive than last year, but they are still price competitive with other fruit which has also gone up. Since they are now a good deal and since the quality is good, I bought another. I see other people doing the same. I conclude that the demand is somewhat price elastic, since we will buy more when the price is competitive. I will buy one at any but a really high price, but I will buy more, and buy watermelon in preference to other fruit when the price is low.

I used to work in a grocery store and it was much better for us to sell produce in season when the price was low. When costs were high and prices were high people bought less produce and spoilage was high. since there is a fairly price elastic demand for watermelon, margins cannot rise with rising prices and so rising prices don't help the grocer. There is considerable cross elasticity since I will buy some fruit every week. If on fruit gets more expensive, I will switch to another. There is some income elasticity for this product, but not much, since margins in the grocery industry are generally low and competition is high. When watermelon is in season, most stores will run it on sale. I wouldn't want to run a grocery store because working in one made my feet hurt and I don't like having to put up with people that much

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