1. The owner of a restaurant is considering lowering menu prices to draw in more customers. He is debating between lowering the price for the steak entree or the salmon entree. When he lowered prices last year, a $2.00 decrease in price for the $15 steak resulted in a growth in steak sales from 75 per week to 100 per week. A $2.50 decrease in the price of the $17 salmon entree increased sales from 40 to 75 meals per week. Which entree should he choose to put on sale? Show your work and explain your answer using elasticity concepts you learned in Chapter 6.
2. Suppose the prices at a local golf course are as follows: $57.50 to play 18 holes. At this price, 1200 customers pay to play a game of golf each day. A rise in the price to $62.50 causes the number of consumers to decline to 800. Use the Arc Method to calculate.
A) What is the price elasticity of demand?
B) What is the degree of elasticity?
C) What happened to total revenue when they raised the price?
D) What will happen to sales if they dropped their price by 2%?
3. Suppose your local grocery store raised price of coffee to $10 per pound from a price of $6 per pound. At $6 per pound the average consumer purchased 2.5 pounds of coffee, but now they only purchase 0.75 pounds. The grocery store owner noticed that tea purchases changed as well. Sales of tea were originally an average of one box per customer but now it has increased to 2 boxes of tea. Use the point method to calculate.
A) Find the cross price elasticity of demand for tea and coffee.
B) What degree of elasticity?
C) What happens to tea consumption when the price of coffee rises by 5%?
D) What does the cross price elasticity of tea and coffee tell you about the relationship between the products?
4. Due to the recent downturn in economic activity, Tom has seen his hours at work reduced. He used to work 30 hours a week at $13 an hour, but now he works 22 hours. Due to this change he noticed he purchased more boxed Macaroni and Cheese, up from 1 box a week to 4. He also reduced his purchase of Coke from two 12-packs to only one 12-pack per week. Use the ARC method to answer the following.
A) What is the income elasticity of macaroni and cheese for Tom?
B) What type of good is Macaroni and cheese for Tom?
C) What is the income elasticity of Coke for Tom?
D) What type of good is Coke for Tom?
5. Suppose that at a price of $4, 300 units are sold. If we increase the price to $5, only 200 units are sold. Without calculating price elasticity of demand, determine whether the elasticity of demand is elastic, inelastic or unit elastic. Explain using elasticity concepts you have learned in this class