Answer to Question #124282 in Economics for ali raza

Question

For the first time in two years, Big G (the cereal division of General Mills) raised cereal
prices by 4 percent. If, as a result of this price increase, the volume of all cereal sold by Big G
dropped by 5 percent, what can you infer about the own price elasticity of demand for Big G
cereal? Can you predict whether revenues on sales of its Lucky Charms brand increased or
decreased? Explain.

Answer 1

If after Big G raised cereal prices by 4 percent the volume of all cereal sold by Big G dropped by 5 percent, then the own price elasticity of demand for Big G is higher than 1, and the demand is elastic.

We can also predict that the revenues on sales of Lucky Charms brand increased if it is a substitute.