Question

1. You are presently selling 1000 cups of coffee per day at $1.00 per cup. You want to increase sales by dropping the price to $0.80 per cup. The Price Elasticity of Demand is -2.2.

1. What is your expected new level of sales?
2. Compare Total Revenue before and after the change in price.
3. How would you characterize this product?

Answer 1

Percentage change in price =($1 - $0.80)/$1=0.2 *100 =20

price elasticity of demand = 2.2 (Neglected minus sign as price and quantity always moves in negative direction)

present quantity = 1000 cups , supposed new quantity is X cups..

then , ((X - 1000)/1000)*100 /20 = 2.2

((X- 1000)/1000)*100 = 2.2 * 20 = 44

X - 1000 = 440

X = 1000+440 = 1440...

a) Expected new level of sales = 1440 cups..

b) Total revenue before change in price =$1* 1000 = $1000

Total revenue after the change in price = $0.8 * 1440 = $1152..

Revenue increased by $1152 - $1000 = $152...

c) As the price elasticity of demand (2.2) greater than 1, the product is elastic in nature...

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