For the first time in two years, Big G (the cereal division of General Mills) ra
ID: 1186461 • Letter: F
Question
For the first time in two years, Big G (the cereal division of General Mills) raised cereal prices by 2 percent. If, as a result of this price increase, the volume of all cereal sold by Big G dropped by 3 percent, what can you infer about the own price elasticity of demand for Big G cereal? Can you predict whether revenues on sales of its Lucky Charms brand increased or decreased? Explain.
Input the data on a Excel spread sheet and run a regression. You must explain how a manager might use R2, t-statistics and F- test to make managerial decision.
Explanation / Answer
Price elasticity is 3/2= 1.5 so we have elastic demand. This means that revenues declined since volume dropped by a larger percentage than price went up.