The following table shows the price elasticity of demand for new car and coffee.
ID: 1094308 • Letter: T
Question
The following table shows the price elasticity of demand for new car and coffee. According to the elasticity computation, by how much would new car sales (quantities) fail if the price increased 20 percent? What about total revenue? Increase or decrease? Explain. b. By how much would coffee sales (entire coffee market) decline if the price of coffee doubled (100%)? If Starbucks (a specific brand of coffee) doubled its coffee price, what would happen to Starbucks' sales? How do you explain these responses?Explanation / Answer
a. Demand of car is highly sensitive to the change in the price. Elasticity has been given as -02 which means there would be double change in opposite direction if price of car increases. Hence, if there is 20 % increase in the price of Car, it would lead to 40% fall in demand for car other things being equal. Reduction in demand would lead to decline in over all revenue since the fall in demand is relatively higher when compared to change in price level.
b. On other hand, Coffee is less sensitive to the change in the price. Price elasticity of demand being -05 implies that 100 % increase in the price of Coffee would lead to only 50 % decline in the demand for Coffee. Starbuck sale would decline.
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