problem6S06key

# problem6S06key - Davis Spring 2006 E303 Problem Set#6 KEY 1...

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Davis, Spring 2006 KEY E303, Problem Set #6 1. We-R-Food's, a restaurant consulting firm estimates that in the Southeastern United States a 10% reduction in the price of fried potatoes will increase sandwich sales by 20%. But they further estimate that a 10% reduction in the price of salads will decrease sandwich sales by 15%. a. What is the implied cross price elasticity of sandwiches with respect to changes in the price of fried potatoes? η sandwiches ff = __% Q s /% P ff = -20/10 = -2 ______________________________________ b. What is the implied cross price elasticity of sandwiches with respect to changes in the price of. salads? η sandwiches salads = _% Q s /% P salads = -15/-10 = 1.5 c. From your cross price elasticity estimates, what can you say about the relationship between fried potatoes and sandwiches, and between salads and sandwiches at fast food restaurants in the Southeastern United States? Why? French fries and Sandwiches___Complements, ________________________ Reason __ η xy <0_____ ____________________________________________ Salads and Sandwiches__Substitutes _____________________________ Reason __ η xy >0 ______________________________________________ 2. Suppose that for Mazda Miata's, the income elasticity η I = 3. a. What does the above information suggest about the kind of product a Mazda Miata is? Why?

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