Researchers Siegfried and Zardoshty estimated the following for coffee: • the cr

Question

Researchers Siegfried and Zardoshty estimated the following for coffee:
• the cross price elasticity of demand between coffee and the price of tea is 0.15 (estimates the relationship between the demand for coffee and the price of tea)
• the price elasticity of demand for coffee is -0.16
• the income elasticity of demand for coffee is +0.51

a. Which of the following term(s) apply to coffee, based on the elasticity information above: normal, inferior, luxury, necessity, elastic, inelastic, unit elastic? Identify all that apply and justify your answer using the elasticity information.
b. If coffee price increases by 2.7%, what is the expected percent change in consumer demand (assuming there are no other changes that would affect demand for coffee)? What is the expected change in revenue derived from coffee sales?
c. If consumer income decreases by 3.2%, what is the expected percent change in consumer demand (assuming there are no other changes that would affect demand for coffee – no price changes)?
d. If coffee price increases by 2.7% and consumer income decreases by 3.2%, what is the expected change in revenue derived from coffee sales?
e. For the purposes of this next question, disregard parts b-d of this problem. Suppose that the price of tea has risen by 3.5%. Coffee producers are considering matching that price increase (increasing coffee prices by 3.5%). If the coffee producers want to earn as much revenue as possible, should they leave coffee prices unchanged or match the price increase in tea? Justify your response

Explanation / Answer

a) Normal,elastic b) Change in demand 7.4% less Revenue derived would be 12% less c) Demand would directly increase by 16% apprx d) change in revenue would be 6%less e)Inorder to earn maximum revenue, coffee price should be lowered a little. Which will directly increase the sale to a new high level.

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