Question

Can someone explain 13 and 14?

price of coffee is raised to $1.80, then 120 cups of tea are sold. 12. Assume the quantity demanded of peanut butter fell by 2% when the price of strawberry jam rose 10%. Calculate the cross-price elasticity of demand between strawberry jam and peanut butter. 13. Given the data in the previous question, are strawberry jam and peanut butter complements or substitutes? 14. A local lunch shop currently expects to sell $1,000 in cheeseburgers and $600 in soft drinks each day (gross revenue). A 10 percent increase in the price of cheeseburgers at the shop would cause a 5% drop in cheeseburgers sold and a 10% drop in the number of soft drinks sold. Assuming no other effects, would the price increase raise or lower total revenue for the local lunch shop? Explain using from one to three sentences.

Answer 1

13. Cross price elasticity of demand = % change in the quantity demanded of peanut butter/% change in the price of strawberry jam = -2/10 = -0.2

As the cross-price elasticity of demand is negative, the two goods are complements. (For substitutes, the cross-price elasticity of demand is positive)

14. Initial revenue from cheeseburgers = (P_c x Q_c) = $1000

Initial revenue from soft drinks = (P_s x Q_s) = $600

Total revenue = $1000 + $600 = $1600

After changes in the prices,

Price of Cheeseburgers = (1+0.10) X P_c = 1.1P_c

Quantity demanded of Cheeseburgers = (1-0.05)Q_c = 0.95Q_c

Revenue from Cheeseburgers= 1.1P_c x 0.95Q_c = 1.045 (P_c x Q_c) = 1.045 x $1000 = $1045

Price of soft drinks = P_s (remains the same)

Quantity demanded of Soft drinks = (1-0.10) x Q_s = 0.90Q_s

Revenue from Soft drinks = P_s x 0.90Q_s = 0.90 (P_s x Q_s) = 0.90 x $600 = $540

Total Revenue = $1045 + $540 = $1585

Therefore, the total revenue decreased due to a 10% increase in the price of cheeseburgers.