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6 January, 11:07

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

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  1. 6 January, 12:15
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    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%
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