US CMA Part 2 · Chapter 6 · Question 15 of 22
Kirkby Coffee raised the price of a product from $20 to $22, and monthly unit sales fell from 5,000 to 4,400. Using simple percentage changes based on the original values, what is the price elasticity of demand (absolute value) and how is demand described?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) 1.2; elastic
Explanation
Percentage change in quantity = (4,400 - 5,000) / 5,000 = -12%. Percentage change in price = ($22 - $20) / $20 = 10%. Elasticity = -12% / 10% = -1.2, or 1.2 in absolute value. Because it exceeds 1, demand is elastic, and total revenue fell from $100,000 to $96,800.
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