Question

6. (10 pts.; 2 pts each) You are the manager for Dunkin Donuts and know the following elasticities: η,-1.2 nay 0.5 n is the price elasticity of demand for Dunkin Donuts (DD) glazed doughnuts, nsya is the cross elasticity of demand between DD glazed doughnuts and Krispy Kreme (KK) glazed doughnuts, ney2 is the cross elasticity of demand between DD glazed doughnuts and DD French Vanilla coffee, and n, 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? 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) c) 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?

Answer 1

a. 0.3 서= 尸 -0.2 p IF we want +。increas- the rale by 30y, prices should be decreare- b 20. ) ./. Change in γeNenug pnu x % change in sales - Price x (o. 3) salessales Eo 2) pnu Safes % change 'n Yeenw - = +(07.

IF price or krípy trene decreases Iy 20'/ then we har Ca 0 2 de Demand far KrSpy kveme amcreasen by to y. because due fo clecvease in Krsps kreme pric demard for DD wit deorease athey ar bsttues each ther

Dunkins donuts ard French verilla coffee an complensen Prv CO DD 0.075 Demand FoDuntin donuts deeas by 7.5,J Ar increase in income 1.2 increases the d e Mand ① DD fer Dun kin donuts Dunkin danu O@p口 쓺 6% ar normel good CRop