1. Suppose you own two Starbucks in your town. both of your locations are genera
ID: 1157446 • Letter: 1
Question
1. Suppose you own two Starbucks in your town. both of your locations are generating below average revenue. you decide to conduct a pricing experiment. the result of the pricing experiment are as follows:
Location 1: A 20% decrease in the price of latte resulted in a 5% increasein quantity demand.
Location 2: An increase in the price of latte from $2 to $2.5 resulted in a drop of quantity demanded from 400 to 250 cups of latte perday.
Given this information, how should you alter your latte prcing policy to increase your total revenue at each location?
(Hint: to answer this question you need to compute the price elasticity of demand for each location and based on your computation you have to decide whether a higher price, a lower price or no change)
2. Suppose that California has recently increase their tax on soft drinks, if the price elasticity of demand is -2.0 and the price of supply is 0.8. who will bear more of the burden of the tax? Why? explain very briefly.
Explanation / Answer
ANS :
we know elasticity of demand = % change in qty demanded / % change in price
location 1 : % change in price = - 20%
% change in qty demanded = + 5%
elasticity of demand = - 5/20 = - 0.25 (inelastic demand)
location 2 : % change in price = (2.5 - 2)/ 2 * 100 = +25%
% change in qty demanded = (250-400)/ 400 *100 = - 37.5%
elasticity of demand = - 37.5 / 25 = - 1.5 ( elastic demand)
given the elasticity, in location 1 since the demand is inelastic so the customers will not deviate from the product even if price changes by a little bit. so, they can increase the price whereas in location 2 the demand is elastic that means even a small change in price will lead to a large change in qty demanded, thus here the price should either remain same or should be decreased but not increased.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.