Question

Using what you know about elasticities of demand, answer the following question.

1. It is well known that college students have very little disposable income, and the marketing department of a local convenience store acknowledges this as fact. The store is adding one product to its inventory. Given the data for each product, which one has the best chance of being added? What other information would you like to know before you make a final decision? Explain your answer.

• Item 1: Cheapo Ear Buds have a Price Elasticity of demand = -3 and an Income elasticity of demand = -2

• Item 2: SoThin T-shirts have a Price Elasticity of demand = -2 and an Income elasticity of demand = 5

Answer 1

cheapo ear buds have negative income elasticity of demand which means that it is an inferior good and with the increase in income sale of cheapo ear bud would decline so possibility of adding sothin T shirt in inventory is more because it has positive income elasticity secondly price elasticity of demand of cheapo ear bud is more its demand is more responsive to price change so if there is a possibility in fall in price the cheapo ear bud could be added to inventory because with fall in prices its demand increase will be comparatively more but if there is possibility that prices can rise than Sothin T shirt will be added to inventory because it will be less responsive to price rise and its fall demand with increase in price will be comparatively less .So before making the final decision it is important to know the income level and price condition in the market.