A newspaper story on the effect of higher milk prices on the market for ice cream contained the following:
"As a result [of the increase in milk prices], retail prices for ice cream are up 4 percent from last year....And ice cream consumption is down 3 percent."
Source: John Curran, "Ice Cream, They Scream: Milk Fat Costs Drive Up Ice Cream Prices," Associated Press, July 23, 2001.
Based on the information given, what is the price elasticity of demand for ice cream?
A)0.75 (in absolute value)
B)1.33 (in absolute value)
C)12%
D)We do not have enough information to calculate the elasticity.

Question

Quizplus · Accepted Answer

The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. Here, the quantity demanded decreased by 3% and the price increased by 4%, so the elasticity is 3%/4% = 0.75 (in absolute value).

A Newspaper Story on the Effect of Higher Milk Prices