Suppose the demand for beer is characterized by the following point elasticities

Question

Suppose the demand for beer is characterized by the following point elasticities:

own price elasticity = -2.5

cross-price elasticity with soda = +3

income elasticity = +2

Based on the given elasticities, answer the following. Explain your answers.

a. If a firm in the industry wishes to increase total sales revenue (ignoring cost considerations), will it raise or lower its selling price? Why?
b. What happens to the demand for beer if the price of soda falls by 2%? Explain your answer.
c. What happens to the demand for beer if consumer income rises by 5%? Be specific.
d. Is beer a normal or inferior good? Explain.

Explanation / Answer

a. will lower the price because its price elasticity is negative.as the price will decrease product of price and change in demand will increase

b. if the price of the soda falls demand for the beer will also decrease and will fall by 3*2 = 6%

c. if consumer income increases by 5% then demand for beer will increase and it will increase by 10%

d. beer is normal good becuse it has positive income elasticity

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