Question

You manage a popular nightclub, and lately revenues have been disappointing Your bouncer suggests that raising drink prices will increase revenues. Your bartender suggests that decreasing drink prices will increase revenues. You aren't sure who is right, but you do know that:
a) Your bouncer thinks the demand for drinks is elastic and the bartender thinks the demand for drinks is inelastic.
b) Your bouncer thinks the demand for drinks is inelastic and the bartender thinks the demand for drinks is elastic.
c) Both the bouncer and bartender think the demand for drinks is elastic.
d) Both the bouncer and bartender think the demand for drinks is inelastic.

Answer 1

Answer:

The correct answer is option b.

Explanation:

The manager of a nightclub wants to increase the revenues. The bouncer suggests increasing the price of drinks while the barender suggests decreasing the price.

An increase in the price of drinks will cause the revenues to increase if the demand for drinks is inelastic. The increase in the price will cause a less than proportionate decrease in the quantity demanded. In this situation, a price rise will increase revenues as well.

While a decrease in the price of a product will cause the revenues to increase if the demand is elastic. In this situation a decrease in the price will cause a more than proportionate increase in the quantity demanded. As a result, the revenues will increase.

This implies that the biuncer thinks the demand for drinks is inelastic while bartender thinks it is elastic.