Question

2. You are presently selling 500 cups of coffee per day at $1.200 per cup. You want to increase sales by dropping the price to $0.80 per cup. The Price Elasticity of Demand is -2.4.

1. What is your expected new level of sales?
2. Compare Total Revenue before and after the change in price.
3. How would you characterize this product?

3. A deli across the street drops the price of their coffee from $1.50 per cup to $1.25 per cup. The Cross Price Elasticity of Demand is 1.2. Using your answer from question 2 above as a starting point, determine your sales volume after the price reduction by the deli.

Answer 1

2)(a) It is given that price elasticity of demand is -2.4 and initial price and quantity is $1.20 per cup and 500 cups respectively.Also new price is $0.80.

Therefore change in price = 1.20 - 0.80

= 0.40

Now we know that

Therefore

  

Therefore expected new level of sales = 500+400

= 900

(b) Total revenue before =500*1.20

= $600

Total revenue after price change = 900*0.80

= $720

Therefore as a result of change in price the total revenue has increased by $120

(c) When the price of the product reduced from $1.20 to $0.80, the demand of coffee has increased from 500 cups to 900 cups. Therefore demand for coffee is elastic ( elasticity greater than 1).