- Consider the following information, produced by a market research agency, about a variety of soft drink your firm produces (Cola Magic) and a competitive model, Lemon Heaven Soda.
All the information relates to long term market adjustments.
- Own price elasticity of demand for the Cola Magic is (-) 2.7
- Cross price elasticity of demand with respect to Lemon Heaven Soda is + 3.2
- Income elasticity of demand for Cola Magic target market is + 1.5
(a) Using the concept of cross price elasticity of demand, does your firm have market power in respect to Lemon Heaven Soda? Why or why not?
(b) Explain the relationship between Cola Magic and Lemon Heaven Soda.
(c) Explain what affect a 10% increase in the income of the targetmarket would be on the demand for the Cola Magic?
(d) Your firm's accountant argues that because the demand for the Cola Magic is price elastic, the firm should drop its price. Briefly discuss this recommendation indicating if you would support this recommendation or not. What other factor(s) would have to be taken into account when giving your recommendation to management.