Question

1. McDonald’s Corporation has conducted the same study in its newly opened restaurant in Amsterdam. The results show that the daily demand for 20 oz Coca-Cola is 2100 bottles at €1 per bottle in Amsterdam. The demand drops to 1500 bottles at $1.1 per bottle. Calculate the slope of the price-response function and the price elasticity and comment on the obtained values.

Answer 1

Given

Original price = 1 Euro , Original demand = 2100 Bottles

Revised price = 1.1 Euro , Revised demand = 1500

1.Slope of the Price response function:

=Change in demand/Change in price

=2100-1500/1-1.1

=600/0.1 (Absolute value)

=6000

2.Formula for Price Elasticity of Demand

=Price Elasticity of Demand (PED) = % Change in Quantity Demanded / % Change in Price

=( (Q_N - Q_I ) / (Q_N + Q_I ) / 2) / (( P_N - P_I ) / ( P_N + P_I ) / 2 )

=( (1500 − 2100) / (1500 + 2100) / 2) / ( (1.1 - 1) / (1.1 + 1) / 2)

= -0.0833 / 0.0238

PED = -3.5

Since |PED| > 1 ⇒ demand is elastic.

Comment:

If the price goes down just a little, consumers will buy a lot more. If prices rise just a bit, they'll stop buying as much and wait for prices to return to normal.

Therefore the consumers are very much price sensitive in the given suitation.