Question

If starbucks's data analytics department estimates the income elasticity of demand for its coffee to be 1.95, how will the prospect of an economic bust (expected to decrease consumers' incomes by 6 percent over the next year) impact the quantity of coffee starbucks expects to sell?

Answer 1

If the income elasticity of demand for Starbucks coffee is 1.95, a 6 percent decrease in consumer incomes would lead to an expected decrease in the quantity of coffee sold by approximately 11.7 percent because Starbucks coffee is a luxury good with demand highly sensitive to income changes.

Step-by-step explanation:

Given Starbucks's estimated income elasticity of demand for its coffee at 1.95, an economic bust that leads to a decrease in consumer incomes by 6 percent would have a significant impact on the quantity of coffee Starbucks expects to sell. Since the income elasticity of demand is >1, Starbucks coffee is considered a luxury good and the demand for it is highly income-elastic. This means that a 6 percent decrease in income would lead to approximately an 11.7 percent decrease in the quantity of coffee sold (1.95 elasticity multiplied by the 6 percent income decrease).