Suppose the demand for energy drinks decreases by 20% due to recent repercussions found in the consumption.If the price elasticity of supply is 1.2 and the price elasticity of demand is 0.80,the percentage change in the equilibrium price for energy drinks will
A) rise by 0.1%.
B) fall by 0.1%.
C) rise by 10%.
D) fall by 10%.

Question

Quizplus · Accepted Answer

Given, the demand for energy drinks decreases by 20%, which means the demand is elastic.
Price elasticity of demand = 0.80 (elastic)

Also, the price elasticity of supply is 1.2 which means supply is inelastic.

By using the formula, % change in equilibrium price = (% change in demand)/ (elasticity of demand + elasticity of supply) * 100

we get, % change in equilibrium price = (-20)/ (0.80 + 1.2) * 100 = -10% (negative sign indicates a decrease in price)

Therefore, the percentage change in the equilibrium price for energy drinks will fall by 10%. Hence, the correct answer is option D.

Suppose the Demand for Energy Drinks Decreases by 20% Due