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Managerial Economics: Demand for Starbuck's Tall Caramel Macchiato

You work for Starbucks and know the following elasticities:

Ep=1.2 EI=2 Exy1=0.4 Exy2=-0.6

Ep is the price elasticity of demand for a Starbucks Tall Caramel Macchiato, Exy1 is the cross elasticity of demand between a Starbucks Tall Caramel Macchiato and Java City's Large Caramel Javalanche, Exy2 is the cross elasticity of demand between a Starbucks Tall Caramel Macchiato and a Starbucks blueberry muffin, and EI is the income elasticity of a Starbucks Tall Caramel Macchiato.

a) If the manager wants to increase his sales of Tall Caramel Macchiato by 6%, in what direction and by how much does he need to change the price?

b) If the manager makes the percentage price change that you calculated in part a) will total revenue increase or decrease? How do you know?

c) Starbucks raises its price of a Tall Caramel Macchiato by 10%. The demand for Starbucks blueberry muffins will change by what percentage and in what direction?

d) Java City lowers the price of its Large Caramel Javalanche by 5%. The demand for Starbucks' Tall Caramel Macchiato will change by what percentage and in what direction?

e) If average income increases by 3% by what percentage and in what direction will the demand for Starbucks' Tall Caramel Macchiato change? Is a Tall Caramel Macchiato a normal good or an inferior good and how do you know?

Solution Preview

Dear student,
The solution is attached.

Homework due Session 3

You work for Starbucks and know the following elasticities:

η= 1.2 η I = 2 η xy1 = 0.4 η xy2 = -0.6

 η is the price elasticity of demand for a Starbucks Tall Caramel Macchiato, ηxy1 is the cross elasticity of demand between a Starbucks Tall Caramel Macchiato and Java City's Large Caramel Javalanche, ηxy2 is the cross elasticity of demand between a Starbucks Tall Caramel Macchiato and a Starbucks blueberry muffin, and η I is the income elasticity of a Starbucks Tall Caramel Macchiato.

a) If the manager wants to increase his sales of Tall ...

Solution Summary

This solution provides step by step calculations in an attached Word document pertaining to Starbuck's demand.

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