question archive When the price of Java Joe's lattes decreased from $5
When the price of Java Joe's lattes decreased from $5
Subject:EconomicsPrice:2.87 Bought7
When the price of Java Joe's lattes decreased from $5.00 to $4.50, the quantity of lattes sold increased from 30 to 40 lattes per day. a. Calculate the price elasticity of demand for Java Joe's lattes. b. Interpret this result: is demand for Java Joe's lattes elastic, inelastic, or unit elastic? Why? C. Thinking about the determinants of PED, list at least two that might explain the elasticity you calculated/interpreted above. Briefly explain each.
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Answer:
(a)
Price elasticity (Ed) = (Change in quantity / Average quantity) / (Change in price / Average price)
= [(40 - 30) / (40 + 30)/2] / [(4.5 - 5) / (4.5 + 5)/2]
= [10 / (70/2)] / [(- 0.5 / (9.5/2)]
= (10 / 35) / (- 0.5 / 4.75)
= - 2.71
(b)
Since absolute value of Ed is higher than 1, demand is elastic.
(c)
Two explanations are:
(I) There are many substitutes available, so consumers are highly sensitive to a change in price, making demand elastic.
(II) Latte is a luxury good, so consumers are highly sensitive to a change in price, making demand elastic.
