Problem
A. On Abbot Kinney blvd, there are two coffee shops near each other. Blue bottle and intelligentsia. Blue bottle used to sell 1k cups of coffee per week. When intelligentsia lowered its prices by 15%blue bottles weekly quantity sold dropped to 900 cups. What is the magnitude of the implied cross price elasticity? What does the cross price elasticity tell you about the two firms products?
B. A new donut store opens next to blue bottle, the donuts tore does not offer coffee, but a lot of their customers enjoy eating their donut while drinking coffee. One week, the donut store offers a special discount. How do you expect the demand for blue bottle coffee and donuts and what would it tell you about the two products?
C. Due to a recession, the income of the average consumer at blue bottle went down by 4%. As a result, blue bottles weekly quantity sold dropped by 7%. What is the implied income elasticity? What does the sign of the income elasticity tell you about what type of product blue bottle coffee is? Define and give one example of a product for which the income elasticity would have the opposite sign?