You are the manager for Dunkin Donuts and know the following elasticities:
η= 1.5 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 glazed doughnuts.
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 direction?
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 direction?
Show your work and formula:
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?
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