Question
In: Economics
2. You are presently selling 500 cups of coffee per day at $1.200 per cup. You...
2. You are presently selling 500 cups of coffee per day at $1.200 per cup. You want to increase sales by dropping the price to $0.80 per cup. The Price Elasticity of Demand is -2.4.
- What is your expected new level of sales?
- Compare Total Revenue before and after the change in price.
- How would you characterize this product?
3. A deli across the street drops the price of their coffee from $1.50 per cup to $1.25 per cup. The Cross Price Elasticity of Demand is 1.2. Using your answer from question 2 above as a starting point, determine your sales volume after the price reduction by the deli.
Solutions
Expert Solution
2)(a) It is given that price elasticity of demand is -2.4 and initial price and quantity is $1.20 per cup and 500 cups respectively.Also new price is $0.80.
Therefore change in price = 1.20 - 0.80
= 0.40
Now we know that 
Therefore 
Therefore expected new level of sales = 500+400
= 900
(b) Total revenue before =500*1.20
= $600
Total revenue after price change = 900*0.80
= $720
Therefore as a result of change in price the total revenue has increased by $120
(c) When the price of the product reduced from $1.20 to $0.80, the demand of coffee has increased from 500 cups to 900 cups. Therefore demand for coffee is elastic ( elasticity greater than 1).
Rahul Sunny answered 1 year agoRelated Solutions
You are presently selling 500 cups of coffee per day at $1.200 per cup. You want...
You are presently selling 500 cups of coffee per day at $1.200
per cup. You want to increase sales by dropping the price to $0.80
per cup. The Price Elasticity of Demand is -2.4.
a) What is your expected new level of sales?
b) Compare Total Revenue before and after the change in
price.
c) How would you characterize this product?
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Amount of Prepaid Card ($) Age Days per Month at Starbucks Cups of Coffee per Day...
Amount of Prepaid Card ($)
Age
Days per Month at Starbucks
Cups of Coffee per Day
Income ($1,000)
5
25
4
1
20
25
30
12
5
35
10
27
10
4
30
5
42
8
5
30
15
29
11
8
25
50
25
12
5
80
10
50
8
3
30
15
45
6
5
35
15
32
16
7
25
15
23
10
1
20
20
40
18
5
40
35
35
12
3
40
40
28...
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Scenario A: If the price of coffee went from $2/cup to $4/cup, and you reduced your...
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9.9
9.7
10.0
10.1
9.9
9.6
9.8
9.8
10.0
9.5
9.7
10.1
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9.6
10.2
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10.0
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pdf
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