Question

A hamburger stand raised the price of its hamburgers from $2.00 to $2.50. As a result, its sales of hamburgers fell from 200 per day to 180 per day. Was the demand for its hamburgers elastic or inelastic? How can you tell?

Answer 1

Answer:

The demand for its hamburgers was inelastic.

Explanation:

The elasticity price of demand is calculated as follows:

ε = (ΔQ/Q) / (ΔP/P) = (ΔQ*P) / (ΔP*Q)

Where:

ε represents the elasticity price of demand,

ΔQ is the variation in the quantity demanded,

ΔP is the variation in prices,

Q is the initial quantity,

P is the initial price.

Replacing in the formula with the given values we have:

ε = $\frac{(180-200)/200}{(2.5-2.0)/2} = \frac{(-20)*2}{(0.5)*200}=-\frac{2}{5} =-0.4$

An elasticity of |ε| < 1 means that the percentual change in the quantity demanded is smaller than the percentual change in its price. Therefore it means that the demand is inelastic.

You can tell that the the demand is inelastic by verifying is the hamburger stand made more profits by raising the price.

Before the stand sold → $2.00 * (200) = $400 worth of hamburgers.

Now the stand sells → $2.50 * (180) = $450 worth of hamburgers.

Which clearly tells that the quantity demanded changed less in proportion to the change in its price.