Imagine a popular bar sells deeply discounted pints every Friday from 3 - 7pm. T

Question

Imagine a popular bar sells deeply discounted pints every Friday from 3 - 7pm. The special has been run for 10 years, and the price has remained unchanged at $2/pint. Suddenly, the bar announces that they are raising the price to $2.50 (using "the bad economy" as the reason). In the months after the price change, revenues from 3 - 7pm on Fridays has increased by 20% compared to the same time period a year earlier. Assuming the price change is the only difference that could have caused the change in revenue, and assuming a linear demand curve, what was the original price elasticity of demand for Friday afternoon pints at this bar?

Explanation / Answer

If revenues have increased after price change, that means quantity demanded has not decreased much in comparison to price change. So this implies price elasticity of demand is less than 1 i.e inelastic demand.

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