You work for Starbucks and know the following:
n=1.2 nI=2 nxy1=0.4 Nxy2= -0.6
n is the price elesticity of demand for a Starbucks tall caramel machiato, nxy1 is the cross elxaticity of demand between a starbucks tall caramel macchiato and Jave City's large caramel Javalance, nxy2 is the croxx elsaticity of demand bewteen a starbucks tall caramel macciato and a starbucks blueberry muffin, nI is the income elasticity of a starbucks tall caramel macchiato.
a) if the manager wants to increase his sales of a tall caramel macchiato by 6%, in what direction and by how much doe he need to change the price? I think he needs to decrease the price by .072 (which is 1.2 x.06=0.072). Not sure if that is correct.
b) if the manager makes the percentage price change that you calculated in part a) will total revenue increase or decrease? How do you now? I think revenue will increase due to the price decrease. The item is elastic.
c) starbucks raises its price of a tall caramel macchiato by 10%. The demand for Starbucks blueberry muffins will change by what percentage and in what direction?
d) Java city lowers the price of its large caramel javalance by 5%. The demand for starbuck's tall caramel machiato will change by what percentage and in what direction?
e) if average income increases by 3% by what percentage and in what direction wil the demand for starbucks tall caramel macchito change? Is a tall caramel macchiato a normal good or an inferior good and how do you know?