Assume that an over the counter cold medicine is introduced in the market. The m

Question

Assume that an over the counter cold medicine is introduced in the market. The medicine is sold in a pack of 100 caplets. Initially, the manufacturer put the product on the market for a price of $20 and seven stores in a district sold 100 packs in a week. This prompted the manufacturer to offer a sale of 25% on the product. As a result, the same seven stores of the district sold 140 packs in a week. Calculate the price of elasiticity of demand and interpret your results. Show the formula for your calculation.

Explanation / Answer

Price elasticity of demand = (% Change in Quantity Demanded)/(% Change in Price)

% change in price = -25% (given)

% change in quantity = (140 - 100)/100 = 40/100 = 40%

There Price elasticity of demand = - 40/25 = -1.6

When we analyze price elasticities we're concerned with their absolute value, so we ignore the negative value. We conclude that the price elasticity of demand when the price increases from $20 to $15 is 1.6

Now, since PEoD > 1 then Demand is Price Elastic (Demand is sensitive to price changes)

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