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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 of a survey, you have determined that reducing the

price of an average meal to $18 would increase the quantity demanded to 450 per day.

a) Compute the price elasticity of demand between these two points.

Answer: -1.1

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

Answer: Demand is elastic, so a reduction in price and increase in quantity would increase

total revenue. Specifically, it rises from $8,000 to $8,100.

c) 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.

Answer: -0.9

d) Would you expect total revenue to rise or fall as a result of this second price reduction? Explain.

Answer: Demand is inelastic, so total revenue will fall. Specifically, it falls from $8,100 to

$8,000.

e) Compute total revenue at the three meal prices. Do these totals confirm your answers in (b) and

(d) above?

Answer: Yes, first it rises from $8,000 to $8,100 and then it falls to $8,000

Written Assignement Unit 2