Delibeefious, a deli selling only beef, face the following demand function (for

Question

Delibeefious, a deli selling only beef, face the following demand function (for beef): Qd = 0.4Y – 0.8Pb + 0.2Pc, where Y is income, Pb is the price of beef ($/Lb) and Pc the price of chicken ($/Lb). Suppose that the price of beef is $10/Lb and Pc equals $5/Lb and Y is equal to $25.

a. Compute the price elasticity of demand. Interpret your result (what does the number you just found mean?). Is the demand elastic or inelastic? Why?

b. Compute the cross-price elasticity of demand. Interpret your result (what does the number you just found mean?). Are the two goods substitutes, complements or unrelated? Why?

c. Compute the income elasticity of demand. Interpret your result (what does the number you just found mean?). Is beef an inferior good or a normal good? Why?

d. Suppose you are working at Delibeefious. One morning, your manager ask you the following question: “Should I increase the price of beef to increase my revenue?” What recommendation would you give to your manager? Why?

Explanation / Answer

a. Compute the price elasticity of demand. Interpret your result (what does the number you just found mean?). Is the demand elastic or inelastic? Why?

Qd = 0.4Y – 0.8Pb + 0.2Pc

price elasticity of demand = dQd/dPb = -0.8

Demand is inelastic, as % change in quantity demanded is less than the % change in price.

b. Compute the cross-price elasticity of demand. Interpret your result (what does the number you just found mean?). Are the two goods substitutes, complements or unrelated? Why?

Qd = 0.4Y – 0.8Pb + 0.2Pc

Cross Price elasticity of Demand = dQd/dPc = 0.2

As the cross price elasticityof demand is positive which means due to increase in price of chicken, the demand for beef will increases.

So the two goods are substitutes ,as when price of chicken increases, people substitute to beef and demand forr beef increases.

c. Compute the income elasticity of demand. Interpret your result (what does the number you just found mean?). Is beef an inferior good or a normal good? Why?

Qd = 0.4Y – 0.8Pb + 0.2Pc

income elasticity of demand Ey = dQd/dY = 0.4

AS income elasticity of demand is positive which means with the increase in income, the demand for beef increaases.

As, demand for beef increaases with increase in income so Beef is a normal good.

d. Suppose you are working at Delibeefious. One morning, your manager ask you the following question: “Should I increase the price of beef to increase my revenue?” What recommendation would you give to your manager? Why?

Yes , I recommend the manager to increase the price of Beef because the demand for beef is price inelastic, i.e change in quantity demanded will be less than the change in price, so revenue will increase, with the increase of price,

As Revenue = Price*Quantity = Increase in price > Decrease in demand = Revenue increases.

If you don't understand anything, then comment, I will revert back on the same.

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