Question

Suppose you manage a convenience mart and are in charge of ordering products but do not set the price. The home office provides the prices. In your area, the income elasticity of demand for peanut butter is -.05. Due to local factory closings, you expect local incomes to decrease by 20% on average in the next month. As a result, you should stock:
a) 20% more peanut butter on the shelves
b) 5% more peanut butter on the shelves
c) 10% more peanut butter on the shelves
d) 10% less peanut butter on the shelves

Answer 1

Answer:

c) 10% more peanut butter on the shelves

Explanation:

Since peanut butter has a negative income elasticity of demand (-0.5) with a decrease in income, there should be an increase in the demand. This is usually true for cheaper goods or goods with low added value. The change in demand (D) is represented as follows:

$D=20\% * 0 .5\\D=10\%$

As a result, you should stock 10% more peanut butter on the shelves.

The answer is c).