Let the price elasticity of demand for a soft drink be - 2. In the year 2005, the per capita consumption of soft drinks was about 500 cans per person, and the average price was $1.00 per can. If we suppose that demand for the soft drink is linear, Q^d = a - bP, where a and b are constants, Q^d is quantity demanded and P is price, an estimate of the demand equation could be: A) Q^d = 100 - 2P B) Q^d = 1500 - 2P C) Q^d = 1500 - 1000P D) Q^d = 1000 - 1500P

Question

Quizplus · Accepted Answer

The price elasticity of demand is -2, which means a 1% increase in price leads to a 2% decrease in quantity demanded. At P = $1, Q^d = 500, so the slope b = 1000 (since elasticity = -b(P/Q)). Thus, the equation is Q^d = 1500 - 1000P.

Let the Price Elasticity of Demand for a Soft Drink