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Price Effects and Changes in the Elasticity of Demand

You decided to open a restaurant, named FunMeal. FunMeal is a fast food restaurant with a very limited menu. It serves only a steak sandwich on a whole-wheat roll plus a salad with any beverage of the customer's choice. Normally the sandwich, salad and beverage meal sells for \$12.00
and the average number of meals sold per month is 7,000
But FunMeals would like to increase its volume, so this month it cut the price to \$10.00
With the price cut the sales volume of meals increased to 8,000

(A) What is FunMeals elasticity of demand?
Is demand elasticity, inelastic, or neither?

(B) Given the price elasticity of demand, would FunMeals be willing to sell at the following rate:
FunMeal would be willing to sell this many per month 10,000
Provided that the average price per meal is \$14.00

Solution Preview

(A)

Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)

% Change in Quantity = [Quantity Demanded New - Quantity Demanded Old] / [Quantity Demanded Old]
= (8000 - 7000) / 7000
= 1000 / 7000
= 0.14

% Change in Price = [Price New - Price Old] / [Price Old]
= (10 - 12) / 12
= ...

Solution Summary

Changes in price can affect the elasticity of demand for a good. This solution uses a specific example, FunMeals restaurant to see whether changing the price of a good would impact the elasticity of demand for that good.

\$2.19