Question

Dave’s Delicious Muffins are sold in California and Oregon. They recently conducted a market research test and discovered that the price elasticity of demand for their muffins is .8 in Oregon and 1.7 in California. Currently, muffins are sold for $3 apiece in both locations. They are looking for advice on their pricing strategy.

Q 41

Question 41

If they increase their price of muffins in California, from $3 to $3.30, what percentage decline would we expect in the quantity demanded, in percentage terms?

Q 42

Question 42

Do we know if revenue will increase or decrease with this price increase to $3.30, relative to the price of $3.00?

Select one:

a. decrease

b. increase

Q 43

Question 43

Do we know if this change in price from $3.00 to $3.30 will increase profits?

Select one:

a. yes, it will decrease profits

b. yes, it will increase profits

c. no, we need more information on costs to determine impact on profits

Q 44

Question 44

The state of Oregon wants to reduce the consumption of bad carbohydrates and muffins are targeted. They plan to add a tax to muffins, to be paid by the consumer. If they want to reduce overall consumption of muffins by 10 percent, how much should they tax muffins, in percentage terms?

Answer 1

41. Intital Price, P₀ = 3$

Increased price P₁=3.30$

Price elasticity of California = 1.7

Price elasticity = Percentage change in quantity demanded/ Percentage change in price

Percentage Change in Price = 3-3.30 /3 = -0.1

substituting the valur in price elasticity formula, ep =

1.7 = percentage change in quantity/ -0.1

Percentage change in quantity = 1.7 *- 0.1 = -0.17

42) when there is an increase in price, the revenue increases on the unit sold which is the price effect

whereas the when the price is increased, only fewer units are sold becuase of the substitution effect

To determine which outweighs the elasticity has to be taken into consideration

In the case of California, since the price elasticity is greater than 1, it is elastic, which means that the increase in price there will be a decrease in revenue

in the case of Oregon, the price elasticity is less than 1, it is inelastic and the revenue will increase

43) option c, we need the cost function to determine the impact of profit. Profit = Revenue- Cost

44) If the consumption has to be reduced by 10%, then tax iposed on it should be 10% , since its a normal good