The price elasticity of demand coefficient for gourmet coffee is estimated to be equal to 1.6.It is expected,therefore,that a 5% increase in price would lead to:
A) a 16% decrease in the quantity of gourmet coffee demanded.
B) a 16% increase in the quantity of gourmet coffee demanded.
C) an 8% decrease in the quantity of gourmet coffee demanded.
D) an 8% increase in the quantity of gourmet coffee demanded.

Question

Quizplus · Accepted Answer

The price elasticity of demand coefficient of 1.6 indicates that gourmet coffee is relatively elastic, which means that a 5% increase in price would lead to a greater than proportionate decrease in the quantity of gourmet coffee demanded. The formula for calculating the percentage change in quantity demanded given a percentage change in price is:

% Change in Quantity Demanded = Price Elasticity of Demand * % Change in Price

Substituting the given values yields:

% Change in Quantity Demanded = 1.6 * 5% = 8%

Therefore, a 5% increase in price is expected to lead to an 8% decrease in the quantity of gourmet coffee demanded. Answer choice C is the only one that matches this result.

The Price Elasticity of Demand Coefficient for Gourmet Coffee Is