Problem 1: The initial price of a cup of coffee is $1, and at that price, 400 cups are demanded. If the price falls to $0.90, the quantity demanded will increase to 500.
a. Calculate the (arc) price elasticity of demand for coffee.
b. Based on your answer, is the demand for coffee elastic or inelastic?
c. Based on your answer to a., if the price of coffee is increased by 10%, what will happen to the revenues from coffee? Carefully explain how you know.
Problem 2: The following are the actual sales for the last six periods:
Period Sales 3MMA
1 750 -----
2 820 723
3 600 757
4 850 783
5 900 817
6 700 ------
a) Calculate the 3 month moving average (3MMA)
b) Using the 3-month moving average, what would be your prediction for period 7?
Problem 3:
a) Define returns to scale.
b) Why this is considered a long run phenomenon?