If The Cross-Price Elasticity Between Ketchup And Hamburgers
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Managerial Economics Assignment
Submitted to Professor Amit Sharma
1. When the price of corn was "low," consumers in the United States spent a total of $8 billion annually on its consumption. When the price halved, consumer expenditures actually DECREASED to $6 billion annually. This indicates that:
A. The demand for corn is elastic.
B. The demand curve for corn is upward sloping.
C. Corn is a Giffen good.
D. The demand for corn is inelastic. Solution: C. Corn is a Giffen good.
Giffen goods are an exception to the Law of Demand. Contrary to the Law of Demand, the Giffen Effect occurs when the price of an inferior good falls and its demand also decreases. This is because people are now allocating their excess disposable income, which increases due to the fall in the consumption of the inferior good, towards a superior good.
2. Suppose market…show more content… If the cross-price elasticity between ketchup and hamburgers is -2.5, a 2 percent increase in the price of ketchup will lead to a:
A. 5 percent drop in quantity demanded of ketchup.
B. 5 percent drop in quantity demanded of hamburgers.
C. 5 percent increase in quantity demanded of ketchup.
D. 5 percent increase in quantity demanded of hamburgers.
Solution: B. 5% drop in quantity demanded of hamburgers
The question indicates towards an inverse relationship between price of ketchup and quantity demanded of hamburgers through the negative symbol attached to the cross price elasticity value. When the price of ketchup increases by 1 unit, quantity demanded of hamburgers decreases by 2.5 units and vice versa. Hence, with an increase in the price of ketchup by 2%, the quantity demanded of hamburgers will decrease by 5%.
7. You are the manager of a popular hat company. You know that the advertising elasticity of demand for your product is 0.25. How much will you have to increase advertising in order to increase demand by 5 percent? A. 0.05 percent
B. 20 percent
C. 25 percent