Reference no: EM132318339

Case Study: Elasticity

Please address the following case study relating to elasticity in a fictitious grocery market. This case study relates to Chapter 6 of the textbook and the lecture on Elasticity.

Note: The lecture is decomposed into four sections that correspond to a section of the case study and related pages of the book. The lecture section and book pages are indicated with each section of the case study.

Please submit your work as a single Word document. When I request calculations, you can write them by hand and incorporate a photograph into the document or you can type up the calculations in the document. Similarly, you can create any tables by hand, in Word, or other ways, but your tables should be clear. The document should be approximately 2-4 pages (counting each side of the paper as a page) in length. Please indicate in some way which part of the document responds to each question. The assignment will be graded based on correctness, effort, and presentation.

Elasticity and its Determinants (pages 197-207)

You are in charge of pricing policy for a grocery store such as Kroger's. If you decrease the price of bananas by 10%, then you observe that quantity sold increases by 4%. What is the (price) elasticity of demand for your bananas?

If elasticity of demand for flowers is 1.5, then what do we expect to happen to quantity demanded if price falls by 8%?

Use the three determinants of demand to explain why you think demand for dry cereal (Corn Flakes, Rice Krispies, etc.) is elastic or inelastic over a 1-month period.

Use the three determinants of demand to explain why you think demand for Bud Light(beer) is elastic or inelastic over a 3-year period.

Calculating Elasticity (pages 207-214)

When you set a price of oranges at $0.50 you sell 12 (1,000's) per week. When you set a price of oranges at $0.80 you sell 6 (1,000's) per week. What is the arc elasticity of demand for oranges over this range?

The (inverse) demand curve for squash is: Q=3-.6p. What is the point elasticity of demand if you charge a price of $2.00.

Elasticity and Revenue (pages 214-219)

Suppose that (inverse) demand for smoked ham is p=10-Q, describe whether the price effect or the quantity effect is dominant at an output of 1 and why. Describe whether the price effect or the quantity effect is dominant at an output of 9 and why.

Describe why profit-maximizing firms would never set output in the inelastic portion of their demand curve.

Other Elasticities (pages 219-225)

Identify three products that you expect to be normal goods and describe why they are likely to be normal goods.

Identify one product that you expect to be an inferior good and describe why that good is likely to be an inferior good.

Identify two sets of substitute products. Give an example cross-price elasticity of demand for each set.

Identify two sets of complementary products. Give an example cross-price elasticity of demand for each set.