You manage Mt. Claire Cafe which sells meals at a price of $8.50 each. The meals include a hot dish and a beverage of your choice. The average number of meals sold per month is 21,000. The owner of Mt. Claire Cafe would like to increase its sales and profits. They know that if the price is lowered, they will sell more meals. So they run an experiment. Price is lowered to $7.50 per meal in March and the number of meals sold increases to 23,000.
a. What is the price elasticity of demand?
b. Is elasticity elastic, inelastic, or neither?
c. What does this mean and why does it matter?
d. Will revenues increase or decrease as a result of the price cut? By how much?
e. Beatrice has calculated the fixed costs for the Cafe are $18,000 per month and each meal costs $4.50. Will profits go up or down as a result of the price cut? By how much?
You manage Mt. Claire Cafe which sells meals at a price of $8.50 each. The meals include a hot dish and a beverage of your choice. The average number of meals sold per month is 21,000. The owner of Mt. Claire Cafe would like to increase its sales and profits. They know that if the price is lowered, they will sell more meals. So they run an experiment. Price is lowered to $7.50 per meal in March and the number of meals sold increases to 23,000.
a. What is the price elasticity of demand?
b. Is elasticity elastic, inelastic, or neither?
c. What does this mean and why does it matter?
d. Will revenues increase or decrease as a result of the price cut? By how much?
e. Beatrice has calculated the fixed costs for the Cafe are $18,000 per month and each meal costs $4.50. Will profits go up or down as a result of the price cut? By how much?
