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Between 2010 and 2015 the average price of tea in the UK increased from £7.20 per kilo to £8.48 per kilo - Edexcel - A-Level Economics A - Question 2 - 2017 - Paper 1
Question 2
Between 2010 and 2015 the average price of tea in the UK increased from £7.20 per kilo to £8.48 per kilo. Over the same period the quantity of tea purchased fell fro... show full transcript
Worked Solution & Example Answer:Between 2010 and 2015 the average price of tea in the UK increased from £7.20 per kilo to £8.48 per kilo - Edexcel - A-Level Economics A - Question 2 - 2017 - Paper 1
Step 1
Assume that the change in the quantity of tea purchased was only caused by the change in the price of tea. Calculate the price elasticity of demand for tea in response to the rise in its price.
Answer
To calculate the price elasticity of demand (PED), we can use the formula:
ext{PED} = rac{ ext{Percentage Change in Quantity Demanded}}{ ext{Percentage Change in Price}}-
Calculate the percentage change in quantity demanded:
- Initial quantity demanded = 97 million kilos
- New quantity demanded = 76 million kilos
- Change in quantity = 76 - 97 = -21 million kilos
- Percentage change = ( rac{-21}{97} imes 100 \approx -21.65)%
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Calculate the percentage change in price:
- Initial price = £7.20
- New price = £8.48
- Change in price = 8.48 - 7.20 = £1.28
- Percentage change = ( rac{1.28}{7.20} imes 100 \approx 17.78)%
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Now substitute these values into the PED formula:
Thus, the price elasticity of demand for tea is approximately -1.2.
Step 2
Calculate the change in total sales revenue for UK tea retailers between 2010 and 2015. You are advised to show your working.
Answer
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Calculate the original sales revenue:
- Original price = £7.20
- Quantity = 97 million kilos
- Original sales revenue = £7.20 × 97 = £698.4 million
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Calculate the new sales revenue:
- New price = £8.48
- Quantity = 76 million kilos
- New sales revenue = £8.48 × 76 = £644.48 million
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Calculate the change in sales revenue:
- Change in revenue = New sales revenue - Original sales revenue
- Change = £644.48 million - £698.4 million = -£53.92 million. Therefore, the change in total sales revenue for UK tea retailers is a decrease of approximately £53.9 million.
Step 3
Estimates for the demand for black tea in the UK suggest that it is an inferior good. This implies it has a negative:
Answer
The correct answer is B: income elasticity of demand. An inferior good is characterized by a negative income elasticity, meaning that as consumer income increases, the demand for the inferior good decreases.