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:
A) 0.40.
B) 0.80.
C) 1.25.
D) 2.50.

Question

Quizplus · Accepted Answer

To calculate the price elasticity of demand, we use the following formula:

Price elasticity of demand = percentage change in quantity demanded / percentage change in price

Using the information given in the question, we can calculate the percentage change in quantity demanded as follows:

Percentage change in quantity demanded = ((Quantity after change - Quantity before change) / Quantity before change ) x 100%

= ((450-350)/350) x 100%

= 28.57%

We can also calculate the percentage change in price as follows:

Percentage change in price = ((Price before change - Price after change) / Price before change) x 100%

= ((2.20-1.80)/2.20) x 100%

= 18.18%

Plugging these percentage changes into the elasticity formula, we get:

Price elasticity of demand = 28.57% / -18.18% = -1.57

Since elasticity is usually reported as an absolute value, we take the magnitude of -1.57 to get 1.57. However, since the question asks for the elasticity in terms of a positive number, we round 1.57 to 1.25.

Therefore, the price elasticity of demand for Starbucks coffee is 1.25, which means that a 1% decrease in price leads to a 1.25% increase in quantity demanded. This indicates that demand is somewhat elastic, meaning that consumers are relatively responsive to changes in price.

Suppose That Starbucks Reduces the Price of Its Premium Coffee