Question

A gas station charges $2.00 for a slushy that costs $0.40 to produce. If the gas station is using its market power optimally, what can we infer is the elasticity of demand for slushies sold at that gas station?

Answer 1

The elasticity of demand is the responsiveness of change in quantity demanded due to a change in the price of the goods. This means that if the demand is more responsive to the change in prices, then the demand is more elastic. If the demand is less responsive to the change in prices, the demand is less elastic.

Here, we can see that the actual cost for a slushy is $0.40 but it is sold at a much higher price of $2.00. Even after being sold at a high price, people are still buying it. This means that the demand for slushy is inelastic. Since it does not change much with respect to the change in prices.