Andy loves Krispy Kreme donuts, but realizes that the price of a glaze donut increased from...

Andy loves Krispy Kreme donuts, but realizes that the price of a glaze donut increased from $1.20 to $1.50. However, he see’s an ad from Dunkin Donuts advertising a sale price of its glaze donut from $1.10 to $0.99. He plans to purchase an additional donut from Dunkin Donuts from 2 to 3. What is the Dunkin Donuts price elasticity of demand? What is the Krispy Kreme price elasticity of demand? What is the cross price elasticity of demand for a Krispy Kreme Donut?

Solutions

Expert Solution

1) Price elasticity of demand of Dunkin Donuts:

The formula for price elasticity, n

n= (Q1 - Q₀) ÷ (Q₁ + Q₀) / (P₁ -P₀) ÷ (P₁ + P₀)

where,

Q₀₌ Initial quantity demand = 2

Q₁= New quantity demand =3

P₀ = Initial price =$1.10

P₁= Initial Price =$ 0.99

n= (Q1 - Q₀) ÷ (Q₁ + Q₀) / (P₁ -P₀) ÷ (P₁ + P₀)

= (3-2)÷(3+2) / (0.99-1.10)÷(0.99+1.10)

= -3.8

Price elasticity of demand is -3.8

2) Price elasticity of demand of Krispy Kreme Donuts:

n= (Q1 - Q₀) ÷ (Q₁ + Q₀) / (P₁ -P₀) ÷ (P₁ + P₀)

= (2-3)÷(2+3) / (1.20-1.50)÷(1.20+1.50)

= -1.8

Price elasticity of demand is -1.8

3) Cross price elasticity of demand for a Krispy Kreme Donut.

Cross price elasticity =

=(Change in quantity demanded ÷ Original quantity demanded )/ (Change in price of other product ÷ Original price of the product)

=(-1)÷(3)/(-0.3 )÷ 1.20)

=1.33

Since the cross price elasticity is positive, both the product are substitute products.

Rahul Sunny answered 1 year ago

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