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Predictions about demand based upon given elasticities

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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.

$2.19
See Also This Related BrainMass Solution

The initial price of a cup of coffee is $1, and at that price, 400 cups are demanded. If the price falls to $0.90, the quantity demanded will increase to 500.

Please see the attached file.

2) The initial price of a cup of coffee is $1, and at that price, 400 cups are demanded. If the price falls to $0.90, the quantity demanded will increase to 500.

a. Calculate the (arc) price elasticity of demand for coffee.
b. Based on your answer, is the demand for coffee elastic or inelastic?
c. Based on your answer to a., if the price of coffee is increased by 10%, what will happen to the revenues from coffee? Carefully explain how you know.

3) The following are the actual sales for the last six periods:
Period Sales 3MMA
1 750 -----
2 820 723
3 600 757
4 850 783
5 900 817
6 700 ------
a) Calculate the 3 month moving average (3MMA)

b) Using the 3-month moving average, what would be your prediction for period 7?

4) a- Define returns to scale.
b-Why this is considered a long run phenomenon?

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