Question

# 1.       A pharmaceutical comes with a new formula based milk; the cost of the milk is \$X....

1.       A pharmaceutical comes with a new formula based milk; the cost of the milk is \$X. The actual selling price of the formulae based milk in the market is marked to 30% higher than the actual cost but the company’s one of the director suggests to set the selling price to 50% higher than the cost ie. 150% in total.

Considering the cost of the milk is \$10 and the price elastic of demand is 2.

1.       What is the price of the milk?

2.       With the same cost of the milk x=10, if the company increases the price from 2x to 2.5x, how much milk should it sell to be at the lower price?

Thanks

1) As per director suggestion, price of milk is 150% of cost of the milk where cost is \$10.

Thus, selling price is \$10 * 1.5 = \$15

2) If price rises from 2x to 2.5x where elasticity of demand is 2

Elasticity of demand = - (%change in quantity demanded / %change in price)

%change in price = [(2.5x - 2x) / 2x] * 100 = 25%

%change in quantity demanded = Elasticity of demand * % change in price

%change in quantity demanded = 2 * 25% = -50%

Milk sold would be 50% less due to 25% rise in price.