Question

In year 2018 price of a (750 ml.) bottle of Port made by Taylor Fladgate of Portugal was €30.00. 100 (thousand) bottles were sold. It was estimated that the own price elasticity of demand for port of that vintage was -1.2. Assuming a straight line demand curve, determine the demand equation for Taylor’s port. Show and explain all your calculations.

Answer 1

We are given that the price of a 750 ml. bottle was €30.00. At this price, a total of 100 (thousand) bottles were sold. The own price elasticity of demand for port of that vintage was -1.2.

Demand equation is assumed to be Q = A + BP where A is the intercept and B is the slope. We know that

elasticity = slope x P/Q

-1.2 = slope x 30/100

This gives slope = -4

Now the demand equation is Q = A - 4P

When P = 30 and Q = 100, we have 100 = A - 4*30. This gives A = 100 + 120 = 220

Hence demand function is Q = 220 - 4P, Q is measured in 1000s and Price in €