Suppose you are the manager of a restaurant that serves an average of 400 meals
ID: 1167924 • Letter: S
Question
Suppose you are the manager of a restaurant that serves an average of 400 meals per day at an average price per meal of $20. On the basis of a survey, you have determined that reducing the price of an average meal to $18 would increase the quantity demanded to 450 per day. A. Compute the price elasticity of demand between these two points.B. Would you expect total revenues to rise or fall? Explain.
C. Suppose you have reduced the average price of a meal to $18 and are considering a further reduction to $16. Another survey shows that the quantity demanded of meals will increase from 450 to 500 per day. Compute the price elasticity of demand between these two points.
D. Would you expect total revenue to rise or fall as a result of this second price reduction? Explain.
E. Compute total revenue at the three meal prices. Do these totals confirm your answers in (b) and (d) above? Suppose you are the manager of a restaurant that serves an average of 400 meals per day at an average price per meal of $20. On the basis of a survey, you have determined that reducing the price of an average meal to $18 would increase the quantity demanded to 450 per day. A. Compute the price elasticity of demand between these two points.
B. Would you expect total revenues to rise or fall? Explain.
C. Suppose you have reduced the average price of a meal to $18 and are considering a further reduction to $16. Another survey shows that the quantity demanded of meals will increase from 450 to 500 per day. Compute the price elasticity of demand between these two points.
D. Would you expect total revenue to rise or fall as a result of this second price reduction? Explain.
E. Compute total revenue at the three meal prices. Do these totals confirm your answers in (b) and (d) above? Suppose you are the manager of a restaurant that serves an average of 400 meals per day at an average price per meal of $20. On the basis of a survey, you have determined that reducing the price of an average meal to $18 would increase the quantity demanded to 450 per day. A. Compute the price elasticity of demand between these two points.
B. Would you expect total revenues to rise or fall? Explain.
C. Suppose you have reduced the average price of a meal to $18 and are considering a further reduction to $16. Another survey shows that the quantity demanded of meals will increase from 450 to 500 per day. Compute the price elasticity of demand between these two points.
D. Would you expect total revenue to rise or fall as a result of this second price reduction? Explain.
E. Compute total revenue at the three meal prices. Do these totals confirm your answers in (b) and (d) above?
Explanation / Answer
A.
Price-elasticity of demand: This is the ratio of percentage change in quantity demanded to percentage change in price.
Percentage change in quantity demanded = [(450-400) / {(450+400) ÷2}] × 100
= (50 / 425) × 100
= 11.76 %
Percentage change in price = [($20 - $18) / {($20 + $18) ÷ 2}] × 100
= ($2 / $19) × 100
= 10.53 %
Price-elasticity of demand = Percentage change in quantity demanded / Percentage change in price
= 11.76 % / 10.53 %
= 1.12
Answer: The price-elasticity of demand is 1.12.
B.
Revenue would rise, since the price-elasticity of demand is more than 1. Elasticity greater than 1 indicates elastic demand.
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