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

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%