In the supermarket MicroPrice, Coca-Cola and Pepsi-Cola both sell for S.80/can e
ID: 1124216 • Letter: I
Question
In the supermarket MicroPrice, Coca-Cola and Pepsi-Cola both sell for S.80/can each. Also, the average weekly sales of Coca-Cola and Pepsi are 4000 and 3000 cans respectively. Further, when Pepsi-Cola introduced a promotional campaign selling Pepsi at $.50/can for one week, the sales for both products were as follows. Coca-Cola sold 3400 cans, while Pepsi sold 4400 this particular week. Based on the above information, please answer the following questions 1) Estimate the price elasticity of demand for Pepsi-Cola 2) Estimate the price elasticity of demand for Coca-Cola 3) How would you term this demand for Pepsi and Coca-Cola, price elastic, price inelastic, otherwise? Please explain 4) Estimate the change in the total revenues of Pepsi-Cola 5) Estimate the cross elasticity of demand for Pepsi and Coca-Cola. 6) Are Pepsi and Coca-Cola complementary, substitute, or not related products? Please explain.Explanation / Answer
(1) Using midpoint method,
Elasticity = (Change in quantity / Average quantity) / (Change in price / Average price)
= [(4400 - 3000) / (4400 + 3000) / 2] / [$(0.5 - 0.8) / $(0.5 + 0.8) / 2]
= [1400 / (7400 / 2)] / [- 0.3 / (1.3 / 2)]
= (1400 / 3700) / (- 0.3 / 0.65)
= - 0.82
(2) Using midpoint method,
Elasticity = (Change in quantity / Average quantity) / (Change in price / Average price)
= [(3400 - 4000) / (3400 + 4000) / 2] / [$(0.5 - 0.8) / $(0.5 + 0.8) / 2]
= [- 600 / (7400 / 2)] / [- 0.3 / (1.3 / 2)]
= (- 600 / 3700) / (- 0.3 / 0.65)
= 0.35
(3)
Absolute value of elasticity for Pepsi is less than 1, so demand is inelastic. It is an ordinary good. But elasticity for Coca-Cola is +0.35, which means demand is inelastic, and it is a Giffen good that does not follow the law of demand.
(4) For Pepsi,
Total revenue before price change = $0.8 x 3000 = $2400
Total revenue after price change = $0.5 x 4400 = $2200
Change in total revenue = $2200 - $2400 = - $200
NOTE: As per Chegg answering guideline, first 4 questions are answered.