The price elasticity of demand for coffee is 2.2 and the price elasticity of supply for coffee is 1.8.If demand increases by 20%,the percentage change in the equilibrium price of coffee will
A) rise by 5%.
B) fall by 5%.
C) rise by 0.2%.
D) fall by 0.2%.

Question

Quizplus · Accepted Answer

The percentage change in the equilibrium price can be calculated using the formula: %ΔPrice = (%ΔQuantity demanded or supplied) / (Elasticity of demand + Elasticity of supply). Here, %ΔQuantity demanded = 20%, Elasticity of demand = 2.2, and Elasticity of supply = 1.8. Substituting these values gives %ΔPrice = 20% / (2.2 + 1.8) = 20% / 4 = 5%. Therefore, the equilibrium price of coffee will rise by 5%.

The Price Elasticity of Demand for Coffee Is 2