The initial price of a cup of coffee is $1, and at that price, 400 cups are demanded. If the price falls to $0.90, the quantity demanded will increase to 500
a. Calculate the (arc) price elasticity of demand for coffee.
b. Based on your answer, is the demand for coffee elastic or inelastic?
c. Based on your answer to a., if the price of coffee is increased by 10%, what will happen to the revenues from coffee? Carefully explain how you know.
a. Arc elasticity = -2.11
b. Elastic
c. Revenues will fall. Demand is elastic, and thus a 1% increase in price will lead to a greater percentage decrease in quantity demanded. Revenues fall because the price increase does not make up for the reduction in sales.
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