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You are the manager for Dunkin Donuts and know the following elasticities:
η I = 1.2
η xy1 = 0.5
η xy2 = -0.5
η is the price elasticity of demand for Dunkin Donuts (DD) glazed doughnuts, ηxy1
is the cross elasticity of demand between DD glazed doughnuts and Krispy Kreme
(KK) glazed doughnuts, ηxy2 is the cross elasticity of demand between DD glazed
doughnuts and DD French Vanilla coffee, and η I is the income elasticity of DD
a) If you want to increase your sales of glazed doughnuts by 30%, in what direction
and by how much do you need to change the price?
b) If you make the percentage price change that you calculated in part a) will total
revenue increase or decrease? How do you know?
c) Krispy Kreme lowers its price of glazed doughnuts by 20%. The demand for
Dunkin Donuts glazed doughnuts will change by what percentage and in what
d) Dunkin Donuts raises the price of its French Vanilla coffee by 15%. The demand
for Dunkin Donuts glazed doughnuts will change by what percentage and in what
e) If average income increases by 5% by what percentage and in what direction will
the demand for Dunkin Donuts glazed doughnuts change? Are DD glazed
doughnuts a normal good or an inferior good and how do you know?