A local coffee shop is facing inelastic demand for its coffee, so the manager decreases the price of coffee by 5%. What will happen to the quantity demanded for this shop’s coffee?

Rationale

Increases by less than 5%

Inelastic demand indicates that consumers are less responsive to price changes; thus, a 5% decrease in price will lead to a proportionally smaller increase in the quantity demanded. This characteristic of inelastic demand means that the percentage change in quantity demanded is less than the percentage change in price.

A (Increases by less than 5%) CORRECT

This choice accurately reflects the nature of inelastic demand. When the price of coffee is reduced by 5%, the quantity demanded will rise, but the increase will be less than the price decrease, demonstrating the inelasticity of demand.

B (Decreases by more than 5%) YOUR ANSWER

This option is incorrect because a decrease in price typically does not lead to a decrease in quantity demanded. In fact, for most goods, a price drop would increase quantity demanded, especially in the context of inelastic demand.

C (Increases by more than 5%) YOUR ANSWER

This choice misrepresents the concept of inelastic demand. If demand were elastic, a decrease in price would lead to a larger percentage increase in quantity demanded, but since the demand is inelastic, the increase will be less than the price reduction.

D (Decreases by less than 5%) YOUR ANSWER

This option is incorrect as it suggests that a price decrease would somehow lead to a decrease in quantity demanded. Under normal circumstances, a price decrease should lead to an increase in quantity demanded, albeit less than the percentage of the price reduction in the case of inelastic demand.

Conclusion

Inelastic demand signifies that the quantity demanded responds less than proportionately to price changes. Therefore, a 5% reduction in the price of coffee at the local shop will result in an increase in quantity demanded by less than 5%. This principle is critical for businesses in pricing strategies, ensuring they understand consumer behavior in response to price adjustments.

A local coffee shop is facing inelastic demand for its coffee, so the manager decreases the price of coffee by 5%. What will happen to the quantity demanded for this shop’s coffee?

Increases by less than 5%

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