3. Peanut Butter and Jelly - Consider the case of a consumer that buys peanut butter...

3. Peanut Butter and Jelly - Consider the case of a consumer that buys peanut butter in six-packs. Use the information that follows to calculate the appropriate elasticities of demand.

a. When the price of a six-pack increased from $18 to $22, the number of six-packs bought decreased from 30 to 20. What is the consumer's price elasticity of demand in this case? How did the consumer's total spending on peanut butter change as a result of this? (Spending by the consumer equals total revenue to firms selling peanut butter.)

b. When the price of jelly decreased from $4 to $2, the number of packs bought went from 20 to 28. What is the consumer's cross-price elasticity of demand for these two products? What does the calculated elasticity imply about the relationship between peanut butter and jelly for this consumer?

c. When the consumer's income decreased from $64,000 to $56,000, purchases of peanut butter six-packs increased from 28 to 36. What is the income elasticity of demand in this case? Based on this calculated elasticity, what type of good is peanut butter as far as this consumer is concerned?

d. When the price of mayonnaise increased from $2.75 to $3.25, the consumer increased consumption from 36 six-packs to 44. What is the cross-price elasticity of demand for these two products? What does the calculated elasticity imply about the relationship between peanut butter and mayonnaise for this consumer?

e. When the price of a jar of jelly decreased from $4 to $2, suppliers of jelly decreased production from 250,000 jars to 150,000 jars. What is the price elasticity of supply for jelly? Give an interpretation of the calculated elasticity.

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Expert Solution

Rahul Sunny answered 1 year ago

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