Calculate price elasticity of demand for the following data and interpret the re

Question

Calculate price elasticity of demand for the following data and interpret the results. Based on the article Chipotle Plans First Price Hike in Three Years from April 18, 2014 on Fox News, Chipotle increased the price of its burrito bowl. The initial price was $8.00 and the new price was $8.40. Chipotle believed that customers valued the product enough to sustain this price increase without decreasing sales and "scaring off customers." The price increase caused quantity demanded to decrease from 100 burrito bowls per hour to 98 burrito bowls per hour Calculate the price elasticity of demand and THOROUGHLY interpret the results.

Explanation / Answer

Price increased from $8.0 to $8.4, % CHange = (8.4/8-1)*100 = 5

The demand went down from 100 to 98 = (98/100-1)*100 = -2

TR before increase in price = 8*100 = $800

TR after increase in price = 8.4*98 = $921.2

We know that elasticity of demand = % Cange in qty demanded/% change in price

Ed = -2/5 = -0.4

This means that the demand for burrito is inelastic. The demand for burrito fell by less than 5 percent increase in price. Therefore Chipotle can be sure that the increase in price will increase the revenue earned from burritos.

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