Due to the impact of Tropical Storm Harry in Caribbean, the price of sugar rises

Question

Due to the impact of Tropical Storm Harry in Caribbean, the price of sugar rises from $0.50 to $1.00 per bag and the quantity demanded falls from 1000 bags to 400 bags.

a. Calculate the elasticity of demand for sugar.

b. Is sugar elastic, unitary elastic, or inelastic in this price range?

c. What is the interpretation of that price elasticity of demand?

d. If the price of sugar ($1.00) were to increase by 15 per cent, what would be the percentage change in the quantity demanded?

e. What happens to total revenue for sugar producers when the price of sugar increases? Explain your answer.

Due to the impact of Tropical Storm Harry in Caribbean, the price of sugar rises from $0.50 to $1.00 per bag and the quantity demanded falls from 1000 bags to 400 bags. a. Calculate the elasticity of demand for sugar b. Is sugar elastic, unitary elastic, or inelastic in this price range? c. What is the interpretation of that price elasticity of demand? d. If the price of sugar ($1.00) were to increase by 15 per cent, what would be the percentage change in the quantity demanded? e. What happens to total revenue for sugar producers when the price of sugar increases? Explain your answer.

Explanation / Answer

The demand for sugar is relatively elastic with absolute Ed more than 1. The formula for Arc Ed

Ed = (Change in Q/Change in P)*(Average P/Average Q)  

The value of elasticity of demand at Ed = 1.3 means that if the price of sugar changes by 1%, then the demand for sugar will change by 1.3%. If the price increases by 1 % the demand will fall by 1.3% and vice versa.

If the price of sugar were to increase by 15%, then the quantity of sugar demanded will decrease by 15*1.3% = 19.5%

The formula Ed = % change in qty demanded/% change in price

-1.3 = % change in quantity/15

% change in quantity = 1.3*15 = 19.5%

The total revenue will fall if there is a rise in prices when the demand for sugar is elastic. That is in this given case where demand is elastic, an increase in price will reduce revenues. The total revenue calculated by the product of price and quantity has clearly fallen in the below given table.

Price Quantity Change in Price Change in Quantity Average Price Average Quantity Ed (Arc) 0.5 1000 1 400 0.5 -600 0.75 700 -1.3

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