Question
4. Maker's Mark wants to use elasticity estimates to make production decisions. a. Suppose in response to the forecasted supply shortage they raised the price
4. Maker's Mark wants to use elasticity estimates to make production decisions. a. Suppose in response to the forecasted supply shortage they raised the price of their product from $30 to $40. In response, total demand reduced from 20,000 units to 18,000 units.
a) What is the own-price elasticity of demand?
b. Interpret this elasticity value. Is demand elastic or inelastic?
c. What would be the impact of increasing price on revenue? Explain your response.
d. Maker's Mark estimates the income elasticity of demand for its whiskey to be 1.6. Suppose they forecast an economic boom that increases consumer income by 3%. What change can we expect in quantity demanded?
e. Suppose the cross-price elasticity between whiskey price and sour mix is -1.5. Currently revenue from whiskey is $10,000 and sour mix is $500. What is the impact on revenue of a 10% price increase?
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