Who can solve this economics question ??? On PED elasticity Urgent help? I?
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Who can solve this economics question ??? On PED elasticity Urgent help? If cross elasticity of demand for coffee and tea is 1.2 If a store sells coffee at 40p a cup and sales of coffee for each month is 1000 If the same store sells tea for 35p a cup and sales of tea for each month is 2500 If the price elasticity of demand for tea is -3 If the store decides to cut the price of coffee by 10p wat effect would this have on the revenue and sales of both products and wouldmu advise the cut and why???
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Answer:
If the store cuts price of coffee by 10P,means (40-30)/40x100=25%, will increase quantity demanded = 3x25=75%. Total revenue from selling coffee will increase= 30x1750 -40x1000=52500-40,000=12,500. The cut price will cause the sale of tea to decrease= 25x1.2=30%,or from 2500 to 1750 Total revenue from selling tea will decrease= 35x2500-35x1750=87,500-61,250=26,250 The price reduction of10p will cause a loss of revenue=26250-12500=13,750. I do hope that it is correct. I have just followed my 101 textbook.Check it out.
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Other answers
I looked up cross elasticity on wikipedia.org which is, %change in demand for product A/%change in price for product B. so if the cross-elasticity coefficient is 1.2, then this means that a 25% reduction in the price of coffee results in a 30% decrease in the demand for tea. before retiring the evening of this post, I said that I could not provide any empirical evidence to support advice against making that cut because I did not have coffee's elasticity of demand and I heard(in my head) that I could make that correlation with the information provided. it seems that she made the assumption that the price elasticity coefficient of -3 is for coffee after I provided the correct answer. so, as I previously stated, i dont want to steal anyones thunder, but i want to wait until closing so that she wont steal mine as she has done in the past, this is capitalism here. i dont know why she would post a wrong answer after I posted the right one, but she has changed her answer in the past after I, and I suspect this will be an ongoing trend. anyway, like I said, since the price elasticity of tea is -3, then a 30% decrease in demand for tea would result from a 10% increase in the price of tea. a 10% increase in the price of tea would result in a 12% increase in demand for coffee due to cross-elasticity coefficient of 1.2. therefore, a 12% increase in demand corresponds to a 25% decrease in price of coffee and thus gives us the price elasticity of -.48. after doing the math, we see that a 25% reduction in the price of coffee leads to a loss of revenue for both coffee and tea which is why we advise against making the cut
not I said the ape
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