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Suppose you are a 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’ve determined that reducing the price of an average meal to $18 would increase the quantity demanded to 450 per day. Would you expect total revenue to rise or fall as a result of this second price reduction? Explain. Compute total revenue at the three meal prices. Do these totals confirm your expectations?

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The question you are asking is an example of price elasticity of demand: how the quantity demanded of a product or service rises or falls in response to a change in the price of that product or service, all else being equal.

The restaurant in question serves an average of 400 meals per day at an average price of $20 per meal. That equates to $8,000 of revenue per day on average (400 meals x $20 average price per meal = $8,000).

However, the survey of the customer base indicates that by reducing the price of an average meal to $18, the quantity demanded would rise to 450 per day...

(The entire section contains 298 words.)

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