10. Researchers Siegfried and Zardoshty estimated the following for coffee: • th
ID: 1254796 • Letter: 1
Question
10. 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. inelastic(since Price elasticity of demand is between 0 and -1) Normal good (since Income elasticity of demand is positive) Necessity (since Income elasticity of demand is less than 1) b. change in demand = PED(price elasticity of demand)*percentage change in price = -0.16*2.7 = -0.432% change in revenue from cofee sales will be the same as change in demand since other things like price remain constant c. change in demand = IED*percentage change in income =0.51*3.2 =1.632% d. change in revenue = sum of earlier changes = 1.632% - 0.432% = 1.2% e. they should leave the cofee prices unchanged...since an increase in tea prices will result in increase for demand of cofee and would have much impact on revenue ...whereas if they increase the price the demand will almost be the same as now and the revenue wont increase by that amount...
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