Question

Addrisi Pasta is currently in equilibrium where they supply​50,000 one-pound boxes of spaghetti at a price of $1.20 per box. The price elasticity of demand for Addrisi Pasta is 1.18 and the price elasticity of supply for the pasta is 0.85. This​ quarter, demand for the pasta has increased by 9​%. The new equilibrium price will be ​$ ​(Enter your response rounded to two decimal​ places.)

Please show with the formula/formulas how to solve this questions step by step.

Answer 1

The new Equilibrium price will be $1.07

Step-by-step explanation:

We know that price elasticity assesses the variation of the quantity demanded of a good or product changes in its price. To find the latest equilibrium price, we need to find the percentage change in price.

Percentage (%) change in price = Price elasticity of demand x Quantity demanded increases

= - 1.18*9%

= - 10.62%

As Quantity demanded increases, price will decrease, therefore, demand elasticity becomes negative.

Therefore, new equilibrium price = Current price x (1 - percentage change in price)

Equilibrium price = $1.20* (1 - 0.1062) = $1.07