Question
In: Economics
If Starbucks’s marketing department estimates the income elasticity of demand for its coffee to be 2.85,...
If Starbucks’s marketing department estimates the income elasticity of demand for its coffee to be 2.85, how will the prospect of an economic bust (expected to decrease consumers’ incomes by 4 percent over the next year) impact the quantity of coffee Starbucks expects to sell?
Solutions
Expert Solution
The income elasticity of demand for Starbucks's coffee is 2.85.
The value of theincome elasticity of demand for Starbucks's coffee is positive.
When the value of the income elasticity of demand for a good is positive then good is said to be a normal good.
So, Starbucks's coffee is a normal good.
In case of a normal good, a decrease in income leads to decrease in quantity demanded of the normal good.
There is prospects of an economic bust and consumers' income is expected to be decreased by 4%.
Being a normal good, a decrease in income will lead to decrease in the quantity demanded of the Starbucks's coffee.
Income elasticity of demand for Starbucks's coffee = % decrease in quantity demanded of Starbucks's coffee/% decrease in income
2.85 = % decrease in the quantity demanded of Starbucks's coffee/4
% decrease in the quantity demanded of Starbucks's coffee = 2.85 * 4 = 11.4
Thus,
The quantity of coffee Starbucks is expected to sell will decrease by 11.4%.
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