Final answer:
Demand elasticity of steak and cross-price elasticity between steak and bourbon are calculated to understand how the quantity demanded of each commodity responds to changes in their respective prices, thus informing pricing and operational strategies.
Step-by-step explanation:
Demand Elasticity and Cross-Price Elasticity
The question pertains to calculating the demand elasticity of steak (ϵ), which measures how much the quantity demanded of steak changes in response to a change in price. We also need to determine the cross-price elasticity of steak and bourbon (ϵxy), which measures how much the demand for one good responds to changes in the price of another good. Based on the consumption patterns provided, when the price of steak increased from $20 to $30, the quantity of steak demanded decreased from 16 to 12 steaks. The cross-price elasticity between steak and bourbon is indicated by the increase in bourbon consumption from 120 to 160 as the price of steak rose. To find the elasticity values, we use the formula: ϵ = (Q2 - Q1) / ((Q2 + Q1)/2) / (P2 - P1) / ((P2 + P1)/2) for demand elasticity, and ϵxy = (QBourbon2 - QBourbon1) / ((QBourbon2 + QBourbon1)/2) / (PSteak2 - PSteak1) / ((PSteak2 + PSteak1)/2) for cross-price elasticity. The calculated values indicate the sensitivity of steak and bourbon to changes in price and can inform pricing strategies.
Understanding the elasticity of commodities like steak and bourbon can inform businesses on how to adjust prices in response to market trends, as seen in historical data from the USDA on the consumption of chicken and beef. Additionally, it can influence pricing strategies for new products like the hair growth drug, as well as operational decisions for companies like UPS or FedEx in relation to the elasticity of gasoline.