Question

If Starbucks’s marketing department estimates the income elasticity of demand for its coffee to be 2.8, how will the prospect of an economic bust (expected to decrease consumers’ incomes by 5 percent over the next year) impact the quantity of coffee Starbucks expects to sell?

Answer 1

Answer:

The percent change in quantity is -0.14%.

Step-by-step explanation:

The formula to compute the change in quantity is:

$Income\ elasticity\ of\ demand=\frac{Percent\ change\ in\ qunatity\ demanded}{Percent\ change\ in\ price}$

The income elasticity of demand is 2.80.

Percent change in price is -5% (since the prices decreases)

Compute the percent change in quantity demanded as follows:

$Income\ elasticity\ of\ demand=\frac{Percent\ change\ in\ qunatity\ demanded}{Percent\ change\ in\ price}\\2.80=\frac{Percent\ change\ in\ qunatity\ demanded}{-5\%}\\Percent\ change\ in\ qunatity\ demanded=2.80\times(-5\%)\\=-0.14\%$

Thus, the percent change in quantity is -0.14%.