Question

Suppose you manage a convenience mart and are in charge of ordering products but do not set the price. The home office provides the prices. In your area, the income elasticity of demand for peanut butter is -.05. Due to local factory closings, you expect local incomes to decrease by 20% on average in the next month. As a result, you should stock:a) 20% more peanut butter on the shelvesb) 5% more peanut butter on the shelvesc) 10% more peanut butter on the shelvesd) 10% less peanut butter on the shelves

Answer 1

The answer is: C) 10% more peanut butter on the shelves

Step-by-step explanation:

To determine what you need to do with your peanut butter stock, you must first determine if the quantity demanded for peanut butter will increase or decrease and at what percentage. To do this we can use the following formula:

change in peanut butter sales = income elasticity of demand x average change in income

change in peanut butter sales = -5% x -20% = 10% increase

Since you expect a 10% increase in the quantity demanded for peanut butter, you should have 10% more peanut butter in stock