Answer :
The city's ability to support a new Starbucks coffee shop can be determined by considering the income elasticity and the expected increase in average household income.
First, let's understand what income elasticity means. Income elasticity measures the sensitivity of demand for a product to changes in income. In this case, the income elasticity for Starbucks coffee products is given as 1.25.
A positive income elasticity greater than 1 suggests that Starbucks coffee products are considered a luxury good. As income increases, demand for luxury goods like Starbucks coffee products tends to increase at a faster rate than income.
With an expected increase in average household income of 20 percent per year for the next 20 years, we can evaluate whether the city can support a new Starbucks coffee shop.
Considering the constant population, the increase in income is likely to lead to an increase in the demand for Starbucks coffee products. However, to determine if the existing two Starbucks coffee shops can handle the increased demand, we need to consider their current capacity.
If the existing Starbucks coffee shops are already operating at full capacity and have just enough customers to survive, it might be feasible to open a new Starbucks coffee shop to meet the growing demand. However, if the existing shops still have room to accommodate more customers, it may not be necessary to open a new store.
To make a more accurate assessment, we would need additional information about the current capacity of the existing Starbucks coffee shops and their potential to accommodate more customers.
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