In the market for alcoholic beverages, a business called Drive-thru Bottle Shop

Question

In the market for alcoholic beverages, a business called Drive-thru Bottle Shop offers a variety of different bottled wines to their customers. They stock many brands, some being very well-known, with others less well known Answer the following questions: a. Consider the market for low cost white wines (less than $20) and high cost white wines ($100 and over). Since the high cost wine takes up more of the consumers budget, the than the high cost wine, ceteris paribus. Type L for Less, M for More or N for No Different. point price elasticity of demand for low cost wine would be b. The demand for a particular wine sees customers purchase 20,000 bottles of wine when the price is $22.99 per bottle, and only 19,500 bottles when the price was increased to $23.49 by the Drive-thru Bottle Shop management. What is the price elasticity of demand using the mid-point formula? decimal places. Answer to the nearest two c. Assume the Drive-thru Bottle Shop is trying to maximise revenue. Considering your findings in part b., did the Drive-thru Bottle Shop's decision to increase the price agree with increasing revenue? Type Y for Yes, N for No or U for Unknown.

Explanation / Answer

(a) L

The lower (higher) the proportion of consumer budget that a good occupies, the lower (higher) its price elasticity of demand.

(b) -1.18

Using mid-point method,

Elasticity = (Change in quantity / Average quantity) / (Change in price / Average price)

= [(19,500 - 20,000) / (19,500 + 20,000)] / [$(23.49 - 22.99) / $(23.49 + 22.99)]

= (- 500 / 39,500) / (0.5 / 46.48)

= - 1.18

(c) N

Since absolute value of elasticity is higher than 1, demand is elastic. With elastic demand, an increase in price decreases total revenue.

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