Problem: Coffee Demand
You run a small coffee roaster and would like to predict what will happen to the quantity demanded for your coffee if you raise your price. While you do not know the exact demand curve for your coffee, you do know that in the first year, you charged a price of $45 and sold 1,200 units, and in the second year, you charged a price of $40 and sold 1,400 units. The economic environment (e. g., competition, income, etc) were similar in the two years.
I. What is the implied own-price elasticity? ls demand elastic, inelastic or unit- elastic?
II. Based on your answer in question (I) If you raise your price, will total revenues increase or decrease?
III. Assume that you maintained a price of $40 in the third year. However, your main competitor decreased its own price by 20% relative to the second year. Following this change, your sales dropped from 1,400 to 1,000 units. What is the magnitude of the cross- price elasticity between your coffee and your competitor one?