Part A) The cafe manager estimates that daily demand for cakes is represented by

Question

Part A)

The cafe manager estimates that daily demand for cakes is represented by

Q = 121.67 – 6.67P where:

P = price per cake in dollars

Q = number of cakes sold per day.

Current average daily sales of cakes are 60. What price is the cafe currently charging for cakes?

Part B)

The store manager notices that a nearby store is charging $8.50 per cake, and is contemplating whether to match the price. Would the store lose revenue on cake sales if it charged $8.50? Use the mid-point method to calculate the price elasticity of demand.

Explanation / Answer

Part A:

Q = 121.67 – 6.67P; Q = 60

60 = 121.67 – 6.67P

6.67P = 121.67 – 60 = 61.67

P = $9.24 per cake.

Part B:

Revenue when the price is $9.24 = 60 x 9.24 = $554.40

Revenue if the price is at $8.50 = 60 x 8.50 = $510

Loss of revenue = $44.40.

Price elasticity by mid-point method:

Change in price = 8.50 – 9.24 = -0.74 (decrease)

Average of (9.24 + 8.5 = 8.87

Percentage change in price = -0.74 / 8.87 = -8.34%

Change in quantity = no change – 0%

Price elasticity of demand = 0 / -8.34 = -0.

Zero (0) price elasticity indicates that is perfectly inelastic.

*****

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects