A local supermarket lowers the price of its vanilla ice cream from $3.50 per half gallon to $3. Vanilla ice cream unit sales increase by 20 percent. The store manager notices that the unit sales of chocolate syrup increase by 10 percent.
1. What is the price elasticity of vanilla ice cream?
2. How would you measure the effect of the ice cream price on chocolate syrup sales?
A) Since chocolate syrup and ice cream are complements, one would measure this effect using the price elasticity of demand for syrup.
B) Since chocolate syrup and ice cream are substitutes, one would measure this effect using the price elasticity of demand for syrup.
C) Since chocolate syrup and ice cream are complements, one would measure this effect using the cross elasticity.
D) Since chocolate syrup and ice cream are substitutes, one would measure this effect using the cross elasticity.
3. Overall, do you think that the new pricing policy was beneficial for the supermarket?
A) No, revenues for both ice cream and syrup fall.
B) Yes, revenues for both ice cream and syrup rise.
C) Yes, while revenues for syrup fall, the increase in ice cream revenue more than offsets the decrease in syrup revenue.
D) No, revenues for syrup fall and the increase in ice cream revenue is not enough to make up for the syrup decrease.