Question

a. Calculate price elasticity given the following information. Is the curve elastic, inelastic or unitary elastic? Original Quantity:3550 lbs of coffee New Quantity: 7100 lbs of coffee Original Price: $15.99/lb New Price: $7.99/lb b. (6 pts) Given the elasticity calculated in part a, will the seller increase or decrease their revenue if they lower the price of coffee? c. (8 pts) Explain the determinants of elasticity.

Answer 1

P	Q	Change in P	Change in Q	Average P	Average Q	Ed midpoint
15.99	3550
7.99	7100	-8	3550	11.99	5325	-1.00

The elasticity of demand is extremely close to 1 would mean that the revenue will be constant. The % change in demand will be same as the percentage change in price. The revenue will also remain constant as it was before the change in price. lowering the price of coffee will not affect the revenue.

Factors affecting elasticity

No of Uses : Higher the no of uses of a good, higher will be the elasticity. If the price of such a good rises, the demand will fall by more percentage than the change in price. The people will lower their use to only those which are necessary.

Percentage of expenditure: If the percent of income spent on a commodity is very low, then an increase/ decrease in price will not have significant effect on the demand that is the demand will be inelastic. If the percent of income spent on a good is high than the demand will be elastic.

Nature of the commodity: The elasticity of necessity will be less than 1 considering the fact the people will demand it even if the price go up. Similarly the demand for luxury and normal goods will fall with an increase in income. (We are not taking any exceptions into consideration here like giffen good whose nature is against the law of demand)