1. The Alpine Bagel Co. is evaluating pricing for Bagels in it's outlet in the student commons.Their in-house consulting team estimated that the daily demand for Bagels in the area to be thefollowingQ = -20P + 10Ps - 20Pc +101Where P = the price of bagels, P, = the price of scones (each), P. = the price of coffee (per cup),and I = Income (average annual disposable income, for students in thousands of dollars)a. Comment on this estimated demand function. Are the signs of the parameters reasonable?Why or why not? (Restrict your commentary to the negative or positive signs on theparameter coefficientReasonable Sign? (Y/N)½½ Ps.Pc½P½IReason

Answered: 1. The Alpine Bagel Co. is evaluating…

Economics Today and Tomorrow, Student Edition

1st Edition

ISBN:9780078747663

Author:McGraw-Hill

Publisher:McGraw-Hill

Chapter7: Demand And Supply

Section: Chapter Questions

Problem 20AA

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1. The Alpine Bagel Co. is evaluating pricing for Bagels in it's outlet in the student commons.
Their in-house consulting team estimated that the daily demand for Bagels in the area to be the
following
Q = -20P + 10Ps - 20Pc +101
Where P = the price of bagels, P, = the price of scones (each), P. = the price of coffee (per cup),
and I = Income (average annual disposable income, for students in thousands of dollars)
a. Comment on this estimated demand function. Are the signs of the parameters reasonable?
Why or why not? (Restrict your commentary to the negative or positive signs on the
parameter coefficient
Reasonable Sign? (Y/N)
½
½ Ps.
Pc
½
P
½
I
Reason

Expert Solution

Step 1

The demand for Bagels is as given :

Q=-20P+10Ps-20Pc+10I

P : Price of Bagels

Ps : Price of scones

Pc : Price of coffee

I : Income

The estimated demand function shows that :

1) A unit increase in the price of bagels will decrease the demand of Bagels by 20 units.

2) A unit increase in the price of scones will increase the price of Bagels by 10 units.

3) A unit increase in the price of coffee will decrease the price of Bagels by 20 units.

4) A unit increase in income of the consumer will increase the demand of Bagels by 10 units.

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Follow-up Question

Suppose that the price of scones = $3, coffee costs $2.5 per cup, and average annual disposable income for students is $15,000. Calculate the demand curve ( NOTE– be certain to enter income appropriately – how is income denominated?

What happens to the predicted number of bagels sold per day if the price of bagels is increased from $1 to $2? Is this a change in demand or a change in quantity demanded?

Initial Quantity: __________________________________

Terminal Quantity __________________________________

Change in Demand or Change in Quantity Demanded (Choose One)

Holding the price of bagels again at $1, what happens to the predicted number of bagels sold per day if the price of coffee increases from $2.5 to $5 per cup. Is this a change in demand or a change in quantity demanded?

= -20P + 10P_s - 20P_c +10I

Initial Quantity: _____________________________________

Terminal Quantity _____________________________________

Change in Demand or Change in Quantity Demanded (Choose One)

Suppose that the price of Bagels is set at $1, and that the other variable values are those mentioned in part 1(b) (price of scones = $3, coffee costs $2.5 per cup, and average per capita disposable income of students is $15 (000). How much consumer surplus do consumers receive at that price? (Show your work)

Consumer Surplus: ______

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