Kellogg\'s Company estimated the demand for its Froot Loops cereal and computed

Question

Kellogg's Company estimated the demand for its Froot Loops cereal and computed these point Elasticities: price elasticity = -2.5, cross-price elasticity with milk= -2, income elasticity = 1.25, cross-price elasticity with General Mills' Trix = 1.75. Indicate whether each of the following statements is true or false, and explain your answer A. A Froot Loop price reduction will increase both the number of units demanded and the total revenue of sellers. B. The cross-price elasticity indicates that a 5% reduction in the price of Milk will cause a 10% increase in Froot Loop demand. C. Demand for For Fruit Loop is price elastic and consumers consider Fruit Loop to be a normal goods. D. Falling Milk prices will increase revenues received by sellers of both Fruit Loop and Milk.

Explanation / Answer

A) False. As price elasticity is negative , so if price increases no of units demanded decreases B)true. As cross elasticity is -2. so if price reduces by 5% then revenue will increase by -(-2)*5 =10% C)True. AS magnitude of price elasticity is > 1. so price elastic and as it is negative, it is normal good. D)False. it will only increase for fruit loop. pls rate me

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