A firm sells two products: coffee and doughnuts. Currently, revenue from coffee sales is $300 per day, while revenue from doughnuts is $200 per day. The own price elasticity of demand for coffee is: EQc,PC = -0.5, while the cross-price elasticity of demand between the price of coffee and demand for doughnuts is: EQD,PC = -1.5.
A) Given the cross-price elasticity of demand, what is the relationship between coffee and doughnuts?
B) If the price of coffee increases by 2% what will be the change in demand for doughnuts?
c) Suppose the price of coffee increased by 1%. Calculate the total change in revenue that results, i.e. including both the change in revenue of coffee AND doughnut