A coffee retailer (Bob’s) developed the following daily demand curve for coffee
ID: 1257665 • Letter: A
Question
A coffee retailer (Bob’s) developed the following daily demand curve for coffee for YourTown, NY.
Q = 500 - 300(P) + 200(Pc) + 0.01(M)
Where P is the price of Bob’s coffee, Pc is the price of Starbuck’s, and M is income in YourTown. Currently Bob’s and Starbuck’s Coffee are priced at $2.00 per cup, and YourTown income is $60,000.
1)What is Bob’s current daily sales? (Show your work)
What happens to Bob’s sales if he increases price to $3.00? (Show your work)
Assuming Bob’s price remains $2.00 but Starbucks price is now $1.00, how will this impact Bob’s daily sales? (Show your work)
With an improving economy YourTown incomes improve to $70,000, all else equal (Both Bob and Starbuck charge $2.00 per cup). How will this impact Bob’s coffee sales. (Show your work)
Explanation / Answer
Q = 500 - 300(P) + 200(Pc) + 0.01(M)
(a) P = Pc = 2, M = 60,000
Q = 500 - (300 x 2) + (200 x 2) + (0.01 x 60,000)
Q = 500 - 600 + 400 + 600
Q = 900
(b) P = 3, Pc = 2, M = 60,000
Q = 500 - (300 x 3) + (200 x 2) + (0.01 x 60,000)
Q = 500 - 900 + 400 + 600
Q = 600
So, Q has decreased by 300 units.
(c) P = 2, Pc = 1, M = 60,000
Q = 500 - (300 x 2) + (200 x 1) + (0.01 x 60,000)
Q = 500 - 600 + 200 + 600
Q = 700
So, Q has decreased by 200 units (compared to part (a))/
(d) P = Pc = 2, M = 70,000
Q = 500 - (300 x 2) + (200 x 2) + (0.01 x 70,000)
Q = 500 - 600 + 400 + 700
Q = 1,000
So, Q has increased by 100 units (compared to part (a)).
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