Ellie hires an economist to determine the demand for nutritional health bars. The
economist tells her that the quantity of her bars demanded is given by the following
equation: Q = 8,000 – 4,000 P + 5 I + 320 Pc, where P is the price charged for each of
Ellie’s bars, I is income per capita in dollars, and Pc is the average price of bars from
competing providers. Assume that the current values are as follows: P = $5; I = $10,000; and Pc = $6.25.
a) What is the price elasticity of demand at the current price and should the price be
increased or decreased in order to raise revenues?
b) Evaluate how the sale of the bars would change during a period of rising incomes.
Are these bars a necessity or a luxury?
c) Assess, in quantitative terms, the impact of a price increase by competing bars: does
Ellie have to worry much about price competition from other providers?
d) Explain briefly what other variables you would consider in estimating the demand
function for bars and why?
