Managerial Economics
In Class Exercise Six (B) - Elasticity Cont.
1. We-R-Food's, a restaurant consulting firm estimates that in the Southeastern United States a 10% reduction in the price of fried potatoes will increase sandwich sales by 20%. But they further estimate that a 10% reduction in the price of salads will decrease sandwich sales by 15%.
a. What is the implied cross price elasticity of sandwiches with respect to changes in the price of fried potatoes?
Cross Price Elasticity =
b. What is the implied cross price elasticity of sandwiches with respect to changes in the price of. salads?
Cross Price Elasticity =
c. From your cross price elasticity estimates, what can you say about the relationship between fried potatoes and sandwiches, and between salads and sandwiches at fast food restaurants in the Southeastern United States? Why?
French fries and Sandwiches are?
Reason:
Salads and Sandwiches are?
Reason:
2. Suppose that for Mazda Miata's, the income elasticity = 3.
a. What does the above information suggest about the kind of product a Mazda Miata is? Why?
K Kind of Product:
Reaso Reason:
b. Economists predict a strong rebound in economic performance this year, and predict that GDP will grow by 4%. What effect will this have on Miata sales?
Hint: GDP is another measure of personal income.
Estimated percentage change in sales =
3. Suppose a competitor lowers the price of a good by 20% and that the price elasticity of demand = -1, the cross price elasticity = 2 and the advertising elasticity = 3.
a. How much must you lower price in order to keep sales constant?
b. Assuming you can't change your price, how much must the firm increase advertising expenditures in order to keep sales constant?
4. Come up with your own elasticity concept that is operational and might helpl out a manager in a firm (one we haven't discussed).
a. Concept?
b. Formula?
c. Used How?