4. Rising wholesale fair-trade coffee bean prices forced the local Dumber f cus

Question

4. Rising wholesale fair-trade coffee bean prices forced the local Dumber f cus of price of coffee from 90 cents to 95 cents a cup. As a result, from 1050 to 870 a day. to raise its Donuts franchise A. What is the midpoint price elasticity of demand for coffee? ls the demand elastic or ine lastic? Why? coffee? Your conclusion should be based on the price elasticity of demand (not the calculation of total revenue). Explain. (4) B. e happened to Dunkin Donut's total revenue when they raised the price of their What should hav C. List two factors (elasticity determinants) that could possible explain the results in part (A). (4)

Explanation / Answer

A.

The midpoint price elasticity of demand for coffee,
= ((q2-q1)/(average(q2,q1))/((p2-p1)/(average(p2,p1))
=((870-1050)/average(870,1050))/((95-90)/(average(95,90))
=-0.188/0.0541
=-3.469

B.

With the increase in price the revenue would decrease as the elasticity is negative. It means for 1 per cent increase in price, leads to 3.469 per cent decrease in quantity

C.

a. People would have switch over because of availability of substitutes
b. As the price increases in order to balance the budget people would have bought less of the good.

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