Question

The south beach cafe recently reduced appetizer prices from $7 to $5 for afternoon "early bird" customers and enjoyed a resulting increase in sales from 100 to 150 orders per day. Beverage sales also increased from 300 to 600 units per day. Calculate the arc price elasticity of demand for appetizers.

Answer 1

Answer: Elasticity is -1.2

Explanation:

Price elasticity of demand measures the responsiveness of quantity demand to a change in the price of the good.

Change in price = $7 - $5 = $2

Change in Quantity = 100 - 150 = - 50

Elasticity using the Ac method is,

$e= \frac{100 - 150}{\frac{100 + 150}{2} } * \frac{\frac{7+5}{2} }{7 - 5}$

$e= \frac{-50}{125} * \frac{6}{2} }$

$e= -1.2$

Thus, elasticity of demand for appetizers is -1.2.