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Predictions about demand based upon given elasticities

Suppose the demand for beer is characterized by the following point elasticities:
own price elasticity = -2.5
cross-price elasticity with soda = +3
income elasticity = +2

Based on the given elasticities, answer the following. Explain your answers.
a. If a firm in the industry wishes to increase total sales revenue (ignoring cost considerations), will it raise or lower its selling price? Why?
b. What happens to the demand for beer if the price of soda falls by 2%? Explain your answer.
c. What happens to the demand for beer if consumer income rises by 5%? Be specific.
d. Is beer a normal or inferior good? Explain.

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Solution

a. If a firm in the industry wishes to increase total sales revenue (ignoring cost considerations), will it raise or lower its selling price? Why?
Absolute value of beers' price elasticity of demand is 2.5, which means it demand is relative ...

Solution Summary

Solution describes the methodology used in predicting about revenue and demand with the help of given data about elasticities.

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