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Explain should they leave coffee prices unchanged

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Reference no: EM13205132

Researchers Siegfried and Zardoshty estimated the following for coffee:
• the cross price elasticity of demand between coffee and the price of tea is 0.15 (estimates the relationship between the demand for coffee and the price of tea)
• the price elasticity of demand for coffee is -0.16
• the income elasticity of demand for coffee is +0.51

a. Which of the following term(s) apply to coffee, based on the elasticity information above: normal, inferior, luxury, necessity, elastic, inelastic, unit elastic? Identify all that apply and justify your answer using the elasticity information.

b. If coffee price declines by 2%, what is the expected percent change in consumer demand (assuming there are no other changes that would affect demand for coffee)? What is the expected change in revenue derived from coffee sales?

c. If consumer income increases by 3.1%, what is the expected percent change in revenue derived from coffee sales (assuming there are no other changes that would affect demand for coffee - no price changes)?

d. If coffee price declines by 2% and consumer income increases by 3.1%, what is the expected change in revenue derived from coffee sales?

e. For the purpose of this part, ignore parts b. through d. Suppose that the price of tea has risen by 1.8%. Coffee producers are considering matching that price increase (increasing coffee prices by 1.8%). If the coffee producers want to earn as much revenue as possible, should they leave coffee prices unchanged or match the price increase in tea?

Reference no: EM13205132

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