Question

Big G cereal recently believes the own price elasticity of demand for its cereal is -0.75. As evidence, Big G management points to a recent price increase of 3% which resulted in a decline of the total volume of cereal by 2.5%. As an outside consultant, you need to determine the veracity of Big G’s conclusion. Provide evidence to support or refute Big G’s statement.

Answer 1

Own price elasticity of demand for Big G's cereal = -0.75

Recently, Big G has increased the price of cereal.

This increase in price will lead to decrease in quantity demanded.

Percentage increase in price = 3%

Calculate the percentage change in quantity demanded -

Percentage change in quantity demanded = Own price elasticity of demand for Big G's cereal * Percentage increase in price

Percentage change in quantity demanded = (-0.75) * 3 = -2.25%

Thus,

The quantity demanded of Big G's cereal will decline by 2.25%.

So,

The sales volume will decline by 2.25%.

If sales volume has decline by 2.50% as stated by management due to increase in price by 3% then, in that case,

Own price elasticity of demand = % decrease in quantity demanded/% increase in price

Own price elasticity of demand = -2.5/3 = -0.83

So,

The own price elasticity of demand for Big G's cereal would be -0.83

So,

Either way the information put up by the Big G is not leading to results as stated by the Big G.

Thus,

The statement of Big G should be refuted.