Shoppers Buy Less While Prices Rise

Answer the following questions to check your understanding of the story.

Calculate the price elasticity of demand for avocadoes if there is no change in the demand for avocadoes in the year to January 2022.

The price elasticity of demand for avocadoes is _____________.

a) 0.45

b) 2.21

c) 1.83

d) 0.55

The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. The percentage change in quantity demanded equals the percentage change in total revenue minus the percentage change in price. Check your calculation.

The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. The percentage change in quantity demanded equals the percentage change in total revenue minus the percentage change in price, which equals 13.3% – 29.4%, a decrease of 16.1%, so the price elasticity of demand is 16.1%/29.4% = 0.55.

What does the total revenue test tell us about the demand for avocadoes?

The total revenue test tells us that the demand for avocadoes is ______________.

a) inelastic because a price rise increases total revenue

b) almost unit elastic because the percentage change in revenue is almost equal to the percentage change in quantity demanded

c) elastic because a price rise increases total revenue

d) inelastic because the increase in price is accompanied by a decrease in quantity demanded

What does the total revenue test tell us about a change in price, a change in total revenue, and the price elasticity of demand?

When the price of avocadoes rises by 29.4 percent, total revenue increases by 13.3 percent, so it must be the case that the percentage decrease in quantity demanded is less than the percentage increase in price. Demand is inelastic.

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