You are Marketing Manager for Bud Beer, produced by the Budweiser Division of
Anheuser-Busch, the brewing company with the highest market share in the United States. The
second-highest market share belongs to Millerâ€™s Beer, produced by Miller Brewer Company. So you know that Millerâ€™s is your most-important competitor. You also know that watching football on TV makes beer more enjoyable. Therefore Bud sales (the demand for Bud Beerâ€”quantity of Bud Beer demanded, number of six-packs per week) depends on the price of Bud beer (dollars per six-pack), the price of Millerâ€™s Beer (dollars per six-pack), and TV football (number of football games on TV per week). Currently, the level of Bud sales is eight million six-packs weekly.
Here are three scenarios, which are independent of each other; so they should be answered separately. Parts (a) and (b) of scenarios 1 and 2 are each worth one point, and scenario 3 is worth one point. Thus a total maximum point score of five.
Scenario 1.The CEO asks you to predict the increase in Bud sales if Bud price is reduced by ten percent. You have to make a sensible prediction.
(a)In the context of this scenario, what elasticity information do you need? (i)Name this elasticity (ii)Define this elasticity.
(b)What assumptions must you make using this elasticity for your prediction? Explain your answer.
Scenario 2.The CEO has learned that Miller will reduce the price of its beer by five percent. The CEO wants to know the effect on Bud salesif she does not reduce the price of Bud beer and if TV football is unchanged. Your staff informs you that the cross-price elasticity of the demand for Bud beer with respect to the price of Millerâ€™s beer is 2.
(a) Why is this elasticity positive (+2) rather than negative (-2)? Explain thoroughly.
(b)What is the new levelof Bud sales (number of six-packs per week)? Show your computation.
Hint:Be sure to distinguish between the change in sales and the new level of sales.
Scenario 3.The National Football League announces that TV football will increase from 95 games to 105 games. Your staff informs you that, assuming the price of Bud beer and the price of Millerâ€™s beer do not change, Bud sales will increase from eight million to ten million weekly.
Using the â€œmidpoint method,â€ compute the â€œelasticity of demand for Bud beer with respect to TV football.â€ Show your computation.