UNIT 2

WRITTEN ASSIGNMENT
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 o1 a survey, you have
determined that Reducing the price of an average meal to S18 would increase the
quantity demanded to 450 per Day.
1. Compute the price elasticity of demand between these two points.
The price elasticity of demand between two points =% Change in demand/%
change in price
Average quantity= (450- 400)/2 =850/2
% change in demand = 50/425 = 2/7(100%) = 11.76%
Average change in Price= (20+18)2 $36/2 -S19
%change in price=-2/19(100%) = -10.52 %
The price elasticity between two points = 11.76%/ -10.52 =-1.11=-1
The price elasticity between two points= I1.76%/ -10.52= -1.1

2. Would you expect total revenues to rise or fall? Explain.

I would expect revenues to rise because the demand rose. Because the elasticity
value is above 1, The total revenue rises because the quantity demanded rises.
3. 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.
Average change in quantity = (500+400)/2=475
% change in quantity= (50/475) % = 10.526%
Average change in Price (18=16)/2= $17 %
Change in Price = (-2/17) % =-11.76
The price elasticity between two points = 10.52%/ -11.76% = -0.89
4. would you expect total revenue to rise or Tall as a result of this second price
Reduction? Explain.
I would expect revenues to rise because the demand rose. Because the elasticity
value is above 1, The total revenue rises because the quantity demanded rises.
5. Compute total revenue at the three meal prices. Do these totals confirm you?
Answers in (b) and (d) above?
a) total revenue at price of $20 = (400x20) =$8,000
b) total revenue at price of S18 = (450x18) =$8,100
c) total revenue at price of S16= (500x 16) =$8,000
This confirms my answers at b and d above.