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Analyzing Income Elasticity and Cross-Price Elasticity of Demand for Pizza and Soft Drinks

This document explores the income elasticity of demand for pizza between two points on a demand curve. It calculates the elasticity value, identifies pizza as a normal or inferior good, and assesses the impact of a price increase in Coca-Cola on Pepsi sales based on their cross-price elasticity. Given a cross-price elasticity of 0.8 between Pepsi and Coca-Cola, we evaluate the effect of a 5% price increase on Coca-Cola and draw conclusions about the nature of their relationship as substitutes.

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Analyzing Income Elasticity and Cross-Price Elasticity of Demand for Pizza and Soft Drinks

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  1. I B $60 A $20 QPizzas 2 4 EQ #6 – AGEC 105 – OCTOBER 5, 2011 (1pts) 1. (a) According to this diagram, calculate the income elasticity of demand for pizza between points A and B. (0.5pts) (b) What kind of good is pizza? (1pt) 2. (a) Assume that a retailer sells 1000 six-packs of Pepsi per day at a price of $3/six-pack. You, as an economic analyst, estimate that the cross-price elasticity between Pepsi and Coca-Cola is 0.8. If the retailer raises the price of Coca-Cola by 5%, how would sales of Pepsi be affected, ceteris paribus? (0.5pts) (b) On the basis of this cross-price elasticity, we may conclude that Pepsi and Coca-Cola are _______________________.

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