Question

Karina owns a small coffee shop in Manassas, VA. She has estimated that if she lowers...

Karina owns a small coffee shop in Manassas, VA. She has estimated that if she lowers the price of a cup of coffee from $2.00 to $1.50, she can increase sales from 400 to 500 coffee cups per day. Using the midpoint formula, the demand for coffee is:

  1. inelastic

  2. elastic

  3. unitarily elastic

  4. perfectly elastic

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Answer #1

The price elasticity of demand would be or or or or . This means that for a unit percent increase in price, the quantity is decreased by 0.7778%.

Since we have , we can state that the demand is inelastic. This means that the quantity change in response to the price change is not as much in percent, as the price change is.

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