Question
1)Betty's bakery estimates that they can sell 400 cookies at $0.60 a cookie and will be able to sell 500 if the price drops to
1)Betty's bakery estimates that they can sell 400 cookies at $0.60 a cookie and will be able to sell 500 if the price drops to $0.50. What is the elasticity of demand for Betty's cookies? Will total revenue rise or fall if the price of cookies is lowered? (2 points)
2)Rising world wholesale fair-trade prices force the local Dunkin' Donuts franchise to raise its price of coffee from 89 cents to 99 cents a cup. As a result, management notices that donut sales fall from 950 to 850 a day. Shortly after the coffee price spike, the local Cinnabon franchise reduced its price on cinnamon rolls from $1.89 to $1.69. This resulted in a further decline in Dunkin' Donuts donut sales to 750 a day.
a)What is the cross price elasticity of demand for coffee and donuts? Are these two products complements or substitutes? (2 points)
b)What is the cross price elasticity of demand for Dunkin' Donuts donuts and Cinnabon cinnamon rolls? Are these two products complements or substitutes? (2 points)
3)When the price of paper increases from $100 to $104 per ton, the quantity supplied increases from 200 to 220 tons per day. What is the price elasticity of supply? (2 points)
4)When a professional football team raises its ticket prices by 10 percent, its sales revenues decline. From this information, what can you say about the price elasticity of demand for its tickets? (2 points)
5)If the price of gasoline is $2.00 and the price elasticity of demand 0.4, what is the new price if there is a 10 percent reduction in the quantity? (2 points)
6)Diamonds clearly satisfy less important needs than water, which is essential to life. Yet according to market prices, the essential commodity, water, is worth less than the less essential commodity, diamonds. Why would a vital commodity such as water sell for so much less than diamonds? Does this imply that there is something wrong with a market system that values diamonds more than water? Explain using demand and supply curves for water and diamonds. (2 points)
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