A local supermarket lowers the price of its T-bone steak from $6.lb to $5.00/lb.Sales increase by 15 percent.The store manager notices that chicken…

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

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?

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