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?
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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