Delibeefious, a deli selling only beef, face the following demand function (for beef): Qd = 0.4Y – 0.8Pb + 0.2Pc, where Y is income, Pb is the price of beef ($/Lb) and Pc the price of chicken ($/Lb). Suppose that the price of beef is $10/Lb and Pc equals $5/Lb and Y is equal to $25.
a. Compute the price elasticity of demand. Interpret your result (what does the number you just found mean?). Is the demand elastic or inelastic? Why?
b. Compute the cross-price elasticity of demand. Interpret your result (what does the number you just found mean?). Are the two goods substitutes, complements or unrelated? Why?
c. Compute the income elasticity of demand. Interpret your result (what does the number you just found mean?). Is beef an inferior good or a normal good? Why?
d. Suppose you are working at Delibeefious. One morning, your manager ask you the following question: “Should I increase the price of beef to increase my revenue?” What recommendation would you give to your manager? Why?