Answer to Question #219761 in Microeconomics for xolly

Question

The following diagram shows what happens if the supply of restaurant meals decreases due to an increase in the cost of producing restaurant meals - the equilibrium price increases and the equilibrium quantity declines. What you need to do is to calculate the price elasticity coefficient for restaurant meals for the price range R100 to R110.

Answer 1

Initially, the market for restaurant meals was in equilibrium at intersection of the demand curve, D, and the supply curve, S.

The initial equilibrium price was 100 and the initial equilibrium quantity was 1000.

So, at price of 100 per meal, 1000 meals are demanded.

After decrease in supply of meals, the new equilibrium is attained at intersection of demand curve, D, and the new supply curve, S1.

The new equilibrium price is 110 and the new equilibrium quantity is 750.

So, at price of 110 per meal, 750 meals are demanded.

P1 = 100

Q1 = 1,000

P2 = 110

Q2 = 750

Calculate the price elasticity coefficient -

$E_p = \frac{\left ( Q2-Q1 \right )}{\left ( Q2+Q1 \right )/2} \times \frac{\left ( P2+P1 \right )/2}{P2-P1}$

$E_p = \frac{\left ( 750-1000 \right )}{\left ( 750+1000 \right )/2} \times \frac{\left ( 110+100 \right )/2}{110-100}Ep = -3$

Thus,

The price elasticity coefficient is equal to -3