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.
)Compute the price elasticity of demand between these two points.
To compute the price elasticity of demand between the two points,let’s say A and B,
Price P at A is $20,and quantity Q at A is 400meals/day.
Price at B is $18,and quantity at B is 4500meals/day.
From A-B,there is a reduction in price of -$2 and a 50meals increase in demand.
From B-A,there is an increase in price of $2 and a reduction of 50meals.
When price falls from $20 to $18,demand increases to 450meals/day.
-Thus,percentage change in quantity between Points A and B is computed in relative to the average of the quantity values at points A ...view middle of the document...
Total revenue rises since demand from point A to B is price elastic as a reduction in price increases total revenue.
)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.
After reducing the average price to $18,demand increases to 450meals per day,with further reduction of average price to $16,demand increases to 500meals per day.
Now,let’s consider points here to be B and C.
From Point B-C,there is a reduction of -$2 and 50meals increase in demand.
From Point C-B,there is an increase of $2 and 50meals decrease in demand.
Average change in quantity=450+500/2=475
Percentage change in quantity=50/475%=10.53%
Average change in price =18+16/2=$17
Percentage change in price = -2/17%= -11.765%
Therefore price elasticity of demand between B and C =10.53%/-11.765%= -0.895
)Would you expect total revenue to rise or fall as a result of this second price reduction? Explain.
Total revenue at price $18=18X450meals=$8100
Total revenue at price $16=16X500meals=$8000
Therefore there will be a fall in total revenue if there is a further reduction of price from $18 to $16.Total revenue falls since demand changes and become price inelastic as a reduction in price reduces total revenue.
)Compute total revenue at the three meal prices. Do these totals confirm your answers in (b) and (d) above?
Total revenue at price $20 and quantity 400meals=20X400=$8000
Total revenue at price $18 and quantity 450meals=18X450=$8100
Total revenue at price $16 and quantity 500meals=16X500=$8000
After computing the total revenue at the three meal prices as shown,I found that these totals confirmed with my answers in (b) and (d) or (2) and (4) above as total revenue at 2 or b is $8100 and total revenue at 4 or d is $8000.
Rittenberg, L. & Tregarthen, T. (2009). Principles of Economics. Flat World Knowledge