Question

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

Answer 1

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.