A newspaper story on the effect of higher milk prices on the market for ice cream contained the following: "as a result (of the increase in milk prices), retail prices for ice cream are up 4 percent from last year... and ice cream consumption is down 3 percent." Given this information, compute the price elasticity of demand for ice cream. Will the revenue received by ice cream suppliers have increased or decreased following the price increase? briefly explain.
Do a little research and then take a shot. what do you think.
Hint: price elasticity is (%change Q)/(%change P) -- you are given both.
Hint 2: Pre-price change Revenue received is P*Q. Adjust P and Q accordingly. Does total revenue go up or down?
.75
To compute the price elasticity of demand for ice cream, we can use the formula:
Price elasticity of demand = (% change in quantity demanded) / (% change in price)
From the given information, we know that the retail prices for ice cream have increased by 4 percent, while ice cream consumption has decreased by 3 percent.
Using these values, we can calculate the price elasticity of demand as follows:
Price elasticity of demand = (-3% / 4%) = -0.75
Since the price elasticity of demand for ice cream is negative (-0.75), it indicates that there is an inelastic demand for ice cream. Inelastic demand means that changes in price have a relatively small impact on the quantity demanded. In this case, as the price increased, the quantity demanded decreased but not proportionally.
Now, to determine the effect on the revenue received by ice cream suppliers, we can use the following rule:
When demand is inelastic, a price increase leads to an increase in revenue.
In this scenario, since the demand for ice cream is inelastic and the price increased, the revenue received by ice cream suppliers is likely to have increased. This is because the increase in price more than offsets the decrease in quantity demanded, resulting in higher total revenue.
In summary, the price elasticity of demand for ice cream is -0.75, indicating inelastic demand. As a result, when the price of ice cream increased by 4 percent and consumption decreased by 3 percent, the revenue received by ice cream suppliers likely increased.
To compute the price elasticity of demand for ice cream, we need to use the formula for price elasticity of demand:
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
Using the information provided, we have:
% Change in Quantity Demanded = (3% decrease in consumption) = -3%
% Change in Price = (4% increase in retail prices) = 4%
Now we can plug these values into the formula:
Price Elasticity of Demand = -3% / 4% = -0.75
The price elasticity of demand for ice cream is -0.75. Since the value is negative, it indicates that ice cream is considered a relatively elastic good, meaning changes in price have a significant impact on the quantity demanded.
Regarding the effect on revenue received by ice cream suppliers following the price increase, we need to consider the relationship between the price elasticity of demand and revenue. If demand is elastic (as is the case here), a price increase will cause revenue to decrease, while a price decrease will cause revenue to increase.
Therefore, when the retail prices for ice cream increased by 4%, we can expect the revenue received by ice cream suppliers to have decreased.