The owner of a small chain of gasoline stations in a large Midwestern town read an article in a trade publication stating that the own price elasticity of demand for gasoline in the United States is -0.2. Because of this highly inelastic demand in the United States, he is thinking about raising prices to increase revenue and profits. Do you recommend this strategy based on the information he has obtained? Explain.

Q2. Fantastic Drink is now developing a tasty alcohol fruit juice 'Tasty' for working people in the middle-income group. It gathered average monthly sales figures (in number of units sold) and other data it believed that they are affecting their sales. When these data are entered into a spreadsheet, it looks like the following table.

Coefficients T-statistic P-value

Intercept 3,400 4.68 0.0032

Price of 'Tasty' (PT) -3.5 -4.58 0.0018

Price of a non-alcohol juice from another brand (PN) 2 3.38 0.0022

Price of a beer from another brand (PW) 1.5 3.28 0.0001

Monthly dollar expenditures on advertising (A) 0.01 1.97 0.053

R2 = 0.69 F=35.8 Significance F = 0.014

The assumed values of the variables are: PT = $70, PN = $62, PW = $40 and A = $50,000

a. Based on these estimates, write an equation that summarizes the demand for 'Tasty' b. Comment on how well the regression line fits the data, its significance as well as the significance of each coefficient. c. Based on your answer in part (a), i. Compute the own price elasticity of 'Tasty' and explain one reason for obtaining the own price elasticity you calculated. ii. Compute the cross-price elasticities of 'Tasty' and the non-alcohol juice. Are they substitutes or complements?

The table shows the own price elasticity of some items in different markets.

Item Market Elasticity

Consumer products

Eggs China -0.78

Milk China -0.29

Soft drinks U.S. -3.09

Liquor U.S. -0.2

Services

Electricity (residential) India -0.65

Electricity (industrial) India -0.45

Based on the above table, which goods/services have elastic and which have inelastic demand? Are their values what you would expect?