Question

Suppose that Starbucks reduces the price of its premium coffee from $2.20 to $1.80 per cup, and as a result, the quantity sold per day increased from 350 to 450. Over this price range, the price elasticity of demand for Starbucks coffee is

Answer 1

Answer:

The correct answer to the following question, price elasticity of demand is 1.25% .

Explanation:

The formula that cab be used to calculate the price elasticity of demand -

% change in quantity demanded / % change in price

Where,

% change in quantity demanded = ( Q2 - Q1) / (Q2 + Q1) / 2 X 100

% change in price = (P2 - P1) /( P2 + P1) / 2 X 100

Here Q2 = 450, Q1 = 350, P2 = $1.80, P1 = $2.20

Putting the values in the formula =

% change in quantity demanded = ( Q2 - Q1 / Q2 + Q1) / 2 X 100

= ( 450 - 350) / (450 + 350) / 2  x 100

= 100 / (800) / 2  x 100

= 100 / 400 x 100

= 25%

% change in price = (P2 - P1) /( P2 + P1) / 2 X 100

= ($1.80 - $2.20 ) / ($1.80 + $2.20 ) / 2  x 100

= (-.4) / 4 / 2  x 100

= -.4 / 2  x 100

= - 20%

so,  % change in quantity demanded / % change in price =

25% / -20%

= 1.25%

Answer 2

The price elasticity of demand for the Starbucks coffee when a price is reduced from $2.20 to $1.80 will be 0.0125 if it sells 100 additional cups.

How to calculate price elasticity of demand?

By applying the given values to the formula, the price elasticity of demand for Starbucks coffee will be calculated as below,

$\rm Price\ Elasticity= \dfrac{\%\ Change\ in\ Demand}{\%\ Change\ in\ Price}\\\\\rm Price\ Elasticity= \dfrac{0.25}{0.20}\\\\\rm Price\ Elasticity= 0.0125$

Hence, it can be said that the price elasticity of demand for the Starbucks coffee will be 0.0125 if the prices and quantity sold are changed as above.

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