A local supermarket lowers the price of its T-bone steak from $6.00.lb to $5.00/lb. Sales increase by 15%. The store manager notices that chicken breast sales decrease by 10%.

a. Calculate the arc price elasticity of T-bone steak. Explain what it means.

b. Calculate the arc cross-price elasticity of chicken breast. Based on your calculation, chicken breast a substitute or complement? Why?

c. Was the pricing decision good or bad for the supermarket? Explain.

d. If you were to estimate a demand equation for T-bone steak, which variables would you choose as explanatory variables?

a. Calculate the arc price elasticity of T-bone steak. Explain what it means.

The price elasticity of elastic of T-bone can be calculated by dividing the change in quantity with the change in the price. The price elasticity is 15 percent. The elasticity of it is more than one which means that the elasticity is highly elastic. In other words with a one percent change in the price, there will be a 15 percent change in the quantity demanded.

b. Calculate the arc cross-price elasticity of chicken breast. Based on your calculation, chicken breast a substitute or complement? Why?

The arc cross elasticity is a method used to measure the elasticity of a product. In this case, the elasticity of a commodity is calculated after the change in the price of the other commodity. With fall in the price of T-bone, there is fall in the quantity demanded of steak. The steak is a substitute good of T-bone. With a fall in the price of T-bone the real money in the hands of the consumer increases. The consumer shifts from steak to T-bone. The graph for steak will be made as given below: