Answer to Question #190870 in Microeconomics for Chikzo

Question

Suppose that you are the owner of an icethat the price elasticity of the demand for ice Would you sell icecream shop and that you have established cream in your particular market is 1,8. cream at R10 per litre or R9 per litre? (2 marks) Explain (3 marks

Answer 1

Solution:

The price elasticity of ice cream is 1.8 which means that its demand is elastic since it is greater than one. Consumers are, therefore, relatively responsive to price changes. Therefore, you should sell the ice cream at a price of R9 per litre.

This is because, if demand is elastic, a company should charge lower prices for it to experience higher revenues, since the percentage drop in price will result in an even larger percentage increase in the quantity sold. Should you charge a higher price of R10, the revenues will decrease massively since an increase in price will result in an even larger percentage decrease in the quantity sold.