Price Elasticity

1. Compute the price elasticity of demand between these two points.
Let quantity demanded = Q, Q1= 400 meals/day, and Q2= 450 meals/day
Let price = P, P1= $20, and P2= $18
The change in quantity demanded = Q2-Q1 = 450-400= 50
The change in price = P2-P1= $18-$20= -2
The average in demand = (Q2+Q1)/2= (450+400)/2= 850/2=425
The average in price = (P2+P1)/2 = (18+20)/2 =38/2= 19
The percentage change in quantity demand = change in quantity demanded/the average in quantity demand =50/425 = 0.1174 = 11.74%
The percentage change in the price =change in price/ the average in price =-2/19= -0.1053= -10.53%
Price elasticity of demand =% change in quantity demanded/ % change in price = 11.64%/-10.53% = -1.11
Therefore, the price elasticity of demand
4. Would you expect total revenue to rise or fall as a result of this second price reduction? Explain.
The total revenues of the restaurant will fall from $8,100 to $8,000.This is because if the price elasticity of demand is less than one, the total revenue will move in the direction of the price change. Or, total revenue is quantity demanded multiplied by price. Before price change, total revenue = 450 x $18 = $8,100. After price change, total revenue = 500 x $16 = $8,000.

5. Compute total revenue at the three meal prices. Do these totals confirm your answers in (b) and (d) above?
Total revenue is quantity demanded multiplied by price = Q x