Question

You are the manager of the Honolulu Gucci retail store in the prestigious Waikiki tourist shopping district. You are the only retailer selling Gucci handbags in Waikiki, an area visited by many tourists. Many of your costs such as rent and staff salaries, are fixed costs. The only extra cost from selling another Gucci handbag is the wholesale cost of the handbag of $800. The own-price elasticity of demand for Guici handbags is 1.8 (in absolute value). The income elasticity of demand for Guici handbags is 1.9. The elasticity of Guici handbag sales with respect to the number of visitors to Honolulu is 0.6. a.(4 points) If you cut the price of a Gucci handbag by 7%, forecast the percentage change in your sales of Gucci handbags, holding everything else constant. b. (4 points) If visits to Hawaii drop 85%, forecast the percentage change in your sales of Gucci handbags, holding everything else constant. c. (4 points) If per capita income falls 3 percent, forecast the percentage change in your sales of Gucci handbags, holding everything else constant. d (4 points) If visits to Hawaii drop 85% and per capita income drops 3%, forecast the percentage change in your sales of Gucci handbags, holding everything else constant except for these two changes. c. (2 points) Are Gucci handbags inferior, normal, or luxury goods? What evidence supports this conclusion?

Answer 1

(a) own price elasticity = -1.8

Thus, 7% decrease in price leads to an chnage in demand of = -7*-1.8 = 12.6% (increase)

(b) Elasticity with resoect to visitors to Honolulu = 0.6

Thus, 85% decrease in visitors leads to a change in demand of = -85*0.6 = -51% (decrease)

(c) income elasticity = 1.9

3% fall in income leads to a change in demand of = -3*1.9 = -5.7% (decrease)

(d) change in demand = -85*0.6 + -3*1.9 = -56.7% (decrease)

(e) The handbags are a luxuary good. thsiis beacuse the income elasticity is positive and greater than 1.