Question

Suppose that the Blinn College Deli is currently selling 500 chef salads per day when the price is $5. Suppose that the own-price elasticity of demand for chef salads is -0.8. The Deli manager would like to increase revenue from chef salads, Which of the following is the best course of action? 

• The best course of action is to raise the price of chef salads, ceteris paribus, since the demand is inelastic 

• The best course of action is to lower the price of chef salads, ceteris paribus, since demand is inelastic. 

• The best course of action is to raise the price of chef salads, ceteris paribus, since the demand is elastic. 

• The best course of action is to lower the price of chef salads, ceteris paribus, since the demand is elastic.

Using the diagrams above, which best represents perfectly elastic demand? 

Answer 1

Question 1:

Answer: Option 1 (The best course of action is to raise the price of chef salads, ceteris paribus, as the demand is inelastic.

Explanation:

The elasticity of demand is -0.8, or |elasticity of demand| is 0.8. Which is less than 1. This implies that the demand is inelastic. For inelastic goods, as the price increases, the decrease in quantity is less than proportionate than the increase in price. Therefore, when the prices are raised, the quantity doesn't fall by much. Hence, revenues can be increased by raising the prices.

Question 2:

Answer: Option 4 (A)

In figure A, we see that at the given price, the demand is infinite. If the prices change even by a very small amount, the demand falls to zero. Therefore, increase in price, changes demand completely and more than proportionately. This demand is perfectly elastic.

On the other hand, in figure B, a change in price has no effect on the quantity demanded. An increase or decrease in price elicits no change in demand. This figure shows completely inelastic demand.

Answer 2

The correct answer is :- Chef salad sales will rise by approximately 8% and total revenue will be lower.

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Calculation:-

The arc price elasticity of demand is given as

Q2-Q1 PA + P2

-0.8 = Q2-500 500 + QZ $4.50 - $5.00 $4.50 + $ 5.00

Q₂ = 544 units

544 - 500 Rise in sale = X 100 500

Rise in sales = 8.8%

Total revenue before price decrease = 500 units x $ 5

Total revenue before price decrease = $ 2500

Total revenue after price decrease = 544 x $ 4.50

Total revenue after price decrease = $ 2,448