arc elasticity of demand
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a) Suppose the current price is $8 per cup. Using elasticity of demand, explain why Starbucks should not increase the price in order to increase total revenue.
(b) Suppose the current price is $2 per cup. Using elasticity of demand, explain why Starbucks should not lower the price in order to increase total revenue.
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The arc elasticity of demand is depicted.
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1. The arc elasticity of demand is % change in quantity/%change in price is [2-1/1.5]/[8-9/8.5] = [1/1.5]/[-1/8.5] = - 5.6666, ie. the demand is very elastic, perfectly elastic. An increase in price causes a large decline in quantity demanded. This makes sense because ...
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