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 absolute value of the price elasticity of demand for Starbucks coffee is
A) 0.40.
B) 0.80.
C) 1.25.
D) 2.50.
E) 4.

Question

Quizplus · Accepted Answer

The price elasticity of demand is calculated using the formula: (percentage change in quantity demanded) / (percentage change in price). The percentage change in quantity demanded is ((450 - 350) / 350) * 100 = 28.57%, and the percentage change in price is ((1.80 - 2.20) / 2.20) * 100 = -18.18%. The absolute value of the elasticity is 28.57% / 18.18% = 1.25.

Suppose That Starbucks Reduces the Price of Its Premium Coffee