Use the concepts of elasticity (price elasticity of demand, income elasticity of
ID: 1105366 • Letter: U
Question
Use the concepts of elasticity (price elasticity of demand, income elasticity of demand and cross elasticity of demand) to explain:
A . Why Applebees offers Kids Eat Free on Tuesday nights, but DisneyWorld charges full price for kids’ dinners?
B . The cost to add a privacy cover to my new car is $150 when I purchase my car; yet, if I wait to purchase it until after I own the car, the price is $200.
C . Cosmetic dealers like Clinique and Estee Lauder, sold in department stores and specialty makeup stores in the mall like Sephora, almost never offer coupon deals. Instead, a few times per year, they offer a special gift if one purchases a fixed dollar amount of goods.
Explanation / Answer
Answer (a) - Applebee’s offers casual dining to American citizens. Disney World’s targeted consumers are kids basically. Demand for Disney World's product is inelastic which mostly comes from kids thus they do not offer to eat free. Demand for Applebee’s is more elastic than Disney World's demand. Therefore Applebee’s offers free to eat for kids.
Answer (b) - Privacy cover and car are complementary goods. At the time of car purchase demand for privacy cover is elastic. After car purchase demand for privacy cover in comparatively inelastic thus price of the privacy cover increases. Cross price elasticity will be negative for complementary goods.
Answer (c) - Cosmetic dealer provides gift when one consumer purchases a fixed amount of goods. Because demand is income inelastic for a certain range and after that demand becomes more income elastic. That is why they offered a gift after a fixed amount of goods.
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