Magee\'s Bakery, in downtown Lexington, estimates that its demand for transparen

Question

Magee's Bakery, in downtown Lexington, estimates that its demand for transparent pies has a
price elasticity of 1:5.
a. Suppose Magee's were to increase its price. In which direction would each of the following move: revenue,
total costs, prot? For each, answer increase", decrease", or uncertain", along with a brief explanation.
b. Suppose Magee's were to decrease its price. In which direction would each of the following move: revenue,
total costs, prot? For each, answer increase", decrease", or uncertain", along with a brief explanation.
c. Finally, suppose for part c only that you now have the additional information that the marginal cost
to Magee's of making one transparent pie is $2 (and is constant). Magee's currently charges $5 for each
transparent pie. Should they increase or decrease this price, or should they leave it at $5?

Explanation / Answer

elasticity of 1:5 means ratio of change in quantity and change in price is 1:5

as price changes quantity changed is less..

hence as price increases revenue increases

an as price decreases revenue decreases

all other thing are uncertain for a and b as quantity is not given

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