Question

A chain store manager decided to reduce the price of cornflakes from forty dollars to thirty dollars per kilogram and as a result, quantity demanded of milk changed from seven hundred thousand kilograms to eight hundred thousand kilograms.

a) Calculate the elasticity coefficient (5 points).

b) What is the relationship between the products (2 points)

c) Interpret the elasticity coefficient (3 points)

Answer 1

a) Elasticity = percentage change in quantity demanded/percentage change in price

= [Q2-Q1/(Q2+Q1/2)]/[P2-P1/(P2+P1/2)]

= [800000-700000/(800000+700000/2)]/[30-40/(30+40/2)]

= [100000/750000]/[-10/35]

= 0.1333/-0.2857

= -0.47

b) As the elasticity is negative, milk and cornflakes are complementary goods

c) The elasticity is -0.47 which shows that the response to the change in quantity demanded is inelastic and a 1% change in price will change the quantity demanded by 0.47%