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Studying the effect of changes in variables on sales

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You are the manager for Dunkin Donuts and know the following elasticities:
n= 1.5 nI = 1.2 nxy1 = 0.5 nxy2 = -0.5

n is the price elasticity of demand for Dunkin Donuts (DD) glazed doughnuts, nxy1 is the cross elasticity of demand between DD glazed doughnuts and Krispy Kreme (KK) glazed doughnuts, nxy2 is the cross elasticity of demand between DD glazed doughnuts and DD French Vanilla coffee, and nI is the income elasticity of DD glazed doughnuts.

a) If you want to increase your sales of glazed doughnuts by 30%, in what direction and by how much do you need to change the price?

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

c) Krispy Kreme lowers its price of glazed doughnuts by 20%. The demand for Dunkin Donuts glazed doughnuts will change by what percentage and in what direction?

d) Dunkin Donuts raises the price of its French Vanilla coffee by 15%. The demand for Dunkin Donuts glazed doughnuts will change by what percentage and in what direction?

e) If average income increases by 5% by what percentage and in what direction will the demand for Dunkin Donuts glazed doughnuts change? Are DD glazed doughnuts a normal good or an inferior good and how do you know?

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a) If you want to increase your sales of glazed doughnuts by 30%, in what direction and by how much do you need to change the price?

Since price and quantity demanded have inverse relationship. Price should be decreased to boost the sales.

% change in price=% change in sales/price elasticity of demand (?)
= 30%/1.5
=20%

Price should be decreased by 20%.

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

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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