Shaun suggests that there wasnt enough time in the experimen

Shaun suggests that there wasn\'t enough time in the experiment. He estimates that in the second month, April, the Café will sell 26,000 meals at $7.50. Please answer the following assuming that Shaun is correct. You want to get an idea of what will happen to profits before you commit to an action. If profits go up when Shaun is correct, then you will keep the current price of $7.50. a. What would be the Price Elasticity of Demand if Shaun is correct? 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 at 26,000 meals? By how much? e. Beatrice has calculated the fixed costs for the Café are $18,000 per month and each meal costs $4.50. Will profits go up or down as a result of the price cut if Mt. Claire sells 26,000 meals? By How much?

Solution

Price elasticity of demand measures the ratio of percentage change in quantity demanded to the percentage change in the price.

PEoD = %chande in quantity demanded / % change in price

Interpretation:

if POeD > 1: it means that demand changes with changes in price. ( demand is price elastic)

if POed = 1: unit elastic

if POeD < 1: id means that demand in not sensitive to changes in price. (demand is price inelastic)

here , earlier price and quantity demanded data is missing.