# A coffee retailer (Joe’s) developed the following daily demand curve for coffee for Elizabethtown, KY. Q = 500 – 300(P) + 200(Pc) + 0.01(A) Where P is the price of Joe’s coffee, Pc is the price of Starbuck’s, and A is Joe’s advertising expense. Currently Joe’s and Starbuck’s Coffee are priced at $2.00 per cup, and Elizabethtown income is $400. 1) What is Joe’s current daily sales? (Show your work ) 2) What happens to Joe’s sales if he increases price of his coffee to $3.00? (Show your work) 3) Now assume Joe’s price remains $2.00 but Starbucks price is now $1.00, how will this impact Joe’s daily coffee sales? (Show your work) 4) Joe listen to the sales pitch of a local newspaper and decided to increase daily advertising from $400 to $600 all else equal (both Joe and Starbucks continue charge $2.00 per cup). How will this impact Joe’s coffee sales.

A coffee retailer (Joe’s) developed the following daily demand curve for coffee for Elizabethtown, KY. Q = 500 – 300(P) + 200(Pc) + 0.01(A) Where P is the price of Joe’s coffee, Pc is the price of Starbuck’s, and A is Joe’s advertising expense. Currently Joe’s and Starbuck’s Coffee are priced at $2.00 per cup, and Elizabethtown income is $400.

1) What is Joe’s current daily sales? (Show your work )

2) What happens to Joe’s sales if he increases price of his coffee to $3.00? (Show your work)

3) Now assume Joe’s price remains $2.00 but Starbucks price is now $1.00, how will this impact Joe’s daily coffee sales? (Show your work)

4) Joe listen to the sales pitch of a local newspaper and decided to increase daily advertising from $400 to $600 all else equal (both Joe and Starbucks continue charge $2.00 per cup).

How will this impact Joe’s coffee sales.

Answer:

The demand curve for coffee is given as

Q = 500 – 300(P) + 200(Pc) + 0.01(A)

Currently Joe’s and Starbuck’s Coffee are priced at $2.00 per cup, and Elizabethtown income is $400.

1) Joe’s current daily sales can be computed by substituting the values in the demand equation

Q = 500 – 300*2 + 200*2 + 0.01*400

= 304 cups

2) If Joe increases price of his coffee to $3.00, then the quantity demanded falls:

Q = 500 – 300*3 + 200*2 + 0.01*400

= 4 cups

3) Now assume Joe’s price remains $2.00 but Starbucks price is now $1.00. Demand for Joe’s coffee will fall by:

Q = 500 – 300*2 + 200*1 + 0.01*400

= 104 cups

4) Joe increases the daily advertising from $400 to $600 all else equal. Joe’s coffee sales will rise by:

Q = 500 – 300*2 + 200*2 + 0.01*600

= 306 cups.