ACCA Applied Knowledge · Business and Technology · Microeconomic factors
A coffee shop raises the price of its bottled juice from $2.00 to $2.40. Weekly sales fall from 500 bottles to 450 bottles. Using the percentage change in quantity divided by the percentage change in price, what is the price elasticity of demand (ignoring the sign), and how is demand best described?
Elasticity is 0.5, found by dividing the 10% fall in quantity by the 20% rise in price. Because the figure is below 1, demand is inelastic, so the price rise increases total revenue from $1,000 to $1,080.
- A0.5, so demand is inelastic and total revenue risesCorrect
- B2.0, so demand is elastic and total revenue falls
- C0.5, so demand is elastic and total revenue rises
Explanation
Quantity change = 50/500 = 10%. Price change = 0.40/2.00 = 20%. Elasticity = 10/20 = 0.5, which is less than 1, so demand is inelastic. Revenue rises from $1,000 (500 x $2.00) to $1,080 (450 x $2.40). The second option inverts the ratio; the third misclassifies a value below 1 as elastic.
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