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Homework answers / question archive / In order to attract more customers on Mondays (a slow day), Alex's Pizza Shop in Austin decided to reduce the price of their pizza rolls from $3
In order to attract more customers on Mondays (a slow day), Alex's Pizza Shop in Austin decided to reduce the price of their pizza rolls from $3.50 to $2.50. As a result, Monday sales increased from 70 to 130. Also, Alex's sales of soft drinks rose from 40 to 90.
a. Calculate the arc price elasticity of demand for the pizza rolls.
b. Calculate the arc cross-price elasticity of demand between soft drink sales and pizza roll prices
For Requirement A
To calculate the price elasticity of demand , we use Midpoint Elasticity formula.
Ed = ((Q2 - Q1) / ((Q2 - Q1) / 2) / (P2 - P1) / ((P1 + P2) / 2))
Ed = Price Elasticity of Demand
We have the following facts,
Q2 = 130
Q1 = 70
P1 = $3.50
P2 = $2.50
So,
Ed= (130 - 70) / ((130 + 70) / 2) / ($2.50 - $3.50) / (($3.50 + $2.50) / 2)
Ed= (60 / 100) / (- $1 / $3)
Ed= - 1.8
Taking the absolute, we can have a price elasticity of 1.8.
For Requirement B
For the cross price elasticity we take the values of soft drinks.
Ec = ((Q2 - Q1) / ((Q2 - Q1) / 2)) / ((P2 - P1) / ((P1 + P2) / 2)
Ec= Cross price elasticity of demand
We have the following facts,
Q2 = 90
Q1 = 40
P1 = $3.50
P2 = $2.50
So,
Ec = ((90 - 40) / ((90 + 40) / 2)) / (($2.50 - $3.50) / (($3.50 + $2.50) / 2))
Ec = (50 / 65) / (- $1 / $3)
Ec = - 2.31
Taking the absolute value, we can have a cross-price elasticity equivalent to 2.31.
