04 Question (2 points) See page 126 Alocal pizzeria sells 500 large pepperoni pi

Question

04 Question (2 points) See page 126 Alocal pizzeria sells 500 large pepperoni pizzas per week at a price of $20 each. Suppose the owner of the pizzeria tells you that the price elasticity of demand for his pizza is 4 and he asks you for advice. He wants to know two things. First, how many pizzas will he sell if he cuts his price by 10%? Second, how will his revenue be affected? 6th attempt See Hint If he cuts his price by 10%, his sales will increase to pizzas, and his total revenue will increase to $ o0000 40

Explanation / Answer

Price elasticity of -4 means if the price of pizza decreases by 1% then the quantity of pizza increases by 4% because of the inverse relationship between the two. If price of pizza is cut by 10%, then quantity demanded will increase by 40%.

If he cuts the price by 10% (that is $2) then quantity demanded will increase by 40% that is 200 pizzas (40% of 500) and revenue will increase by (18*200=$3600).

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