The South Beach Cafe recently reduced appetizer prices from $12 to $10 for afternoon "early bird" customers and enjoyed a resulting increase in sales from 90 to 150 orders per day. Beverage sales also increased from 300 to 600 units per day.

A. Calculate the arc price elasticity of demand for appetizers.

B. Calculate the arc cross-price elasticity of demand between beverage sales and appetizer prices.

C. Holding all else equal, would you expect an additional appetizer price decrease to $8 to cause both appetizer and beverage revenues to rise? Explain.

Solution Preview

Price elasticity of demand is defined to be

Price Elasticity = (% Change in Quantity) / (% Change in Price)

In this case the price changed from $12 to $10. So the change is $2. Depending on how you define percentage change the numbers we get will be different. I will use the following formula:

% Change = (New Value - Old Value) / (Average of ...

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