Kevin and Sarah want to determine if their business is elastic or inelastic and
ID: 370052 • Letter: K
Question
Kevin and Sarah want to determine if their business is elastic or inelastic and by how much. They have done some research and determined demand at their current price and at a proposed new price. What is the coefficient of elasticity for their meal service based on these projections?
Current price = $200 per week
Proposed new price = $250 per week
Current demand = 300 customers a week
Demand at the new price = 240 customers a week
The formula for calculating elasticity is:
Ed = {(Q1-Q2) / [1/2 (Q1+Q2)] } / {(P1-P2) / [1/2 (P1 + P2)]}
Where:
Q1 = Old Quantity – this is the current quantity
Q2 = New Quantity – this is the quantity that results from the future or proposed price change
P1 = Old Price – this is usually the current price
P2 = New Price – this is the price that will change in the future or the price that is being proposed
1) .1
2) 1.1
3) .01
4) 2.1
5) 1
Explanation / Answer
Q1 = 300
Q2 = 240
P1 = 200
P2 = 250
Ed = {(300-240)/(300+240)/2}/{200-250)/(200+250)/2} = 0.222/-0.222 = -1
Ans: 5
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