Decide whether your city can support a new Starbuck shop: There are currently 4

Question

Decide whether your city can support a new Starbuck shop: There are currently 4 Starbucks coffee shops in the city, and each has just enough to serve its customers. The average household income in the city is expected to increase by 10 percent per year for the next few years. Suppose the income elasticity of demand for Starbucks products is 1.25. The population of the city is constant.

1. By what percentage will the demand for coffee increase each year? Show how you got the solution.

2. How soon will the area have enough demand to support a fifth Starbuck? Show how you got the solution.

Explanation / Answer

Income Elasticity of Demand = % change in quantity demanded / % change in income

after one year ,

1.25 = % change in coffee demanded/ 10

% change in coffee demanded = 12.5

after 2 yrs

1.25 = % change in coffee demanded / 21

% change in coffee demanded = 26.25

after 3 yrs

1.25 = % change in coffee demanded / 33.1

% change in coffee demanded = 41.375

after 4 yrs

1.25 = % change in coffee demanded / 46.41

% change in coffee demanded = 58

after 5 yrs ,

1.25 = % change in coffee demanded / 61.1

% change in coffee demanded = 1.25 x 61.1 = 76. 375

from data above we conclude that ... after 4 yrs the demand has increased to more than 50% so we can have a new coffee shop by then ...

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