Question

The price elasticity of demand for beer has been estimated to be about -0.5. Data from the Beer Institute for 2017 shows that Florida beer drinkers consumed 144 million gallons of beer that year. In 2017, the average retail price per gallon of beer about $48.00. Using this information, derive the linear demand function for the beer market in Florida in 2017.

Answer 1

Demand function is Q = A – BP.

Here we have elasticity = B*P/Q.

Hence, we have -0.5 = B*48/144.

This gives B = -0.5*144/48 = 1.5.

This implies 144 = A – 1.5*48.

Thus, A = 144 + 48*1.5 = 216.

So the demand equation is Q = 216 – 1.5P where Q is in millions of gallon and P is price per gallon.