Kevin and Sarah want to determine if their business is elastic or inelastic and

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

5) 1

Does this coefficient make their service elastic or inelastic?

1) Elastic

2) Inelastic

3) Unitary Elastic

4) None of these

5) They need more information to know this

Explanation / Answer

Answer is option3, unitary elastic.

Explanation

Given, Q1= 300, Q2 = 240, P1= $200, P2= $250

Here elasticity coefficient, Ed= {(Q1-Q2) / [1/2 (Q1+Q2)] } / {(P1-P2) / [1/2 (P1 + P2)]}

                                                    = {(300-240)/[1/2(300+240)]}/{(200-250)/[1/2(200+250)]}

                                                    = 0.2222/-0.2222= -1

Here elasticity coefficient Ed = -1 and in this condition, a change in the price causes an equal and opposite shift in the demand and the condition is called to be unitary elastic.

Hence the answer is option3, unitary elastic.

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