A local restaurant has estimated that the price elasticity of demand for meals is equal to 2.If the restaurant increases menu prices by 5%, they can expect the number of customers to decrease by ________and total revenue to _.
A)10%; increase
B)5%; stay constant
C)10%; fall
D)2.5%; fall

Question

Quizplus · Accepted Answer

A price elasticity of 2 means that a 5% increase in price will result in a 10% decrease in quantity demanded (2 x 5% = 10%). As total revenue is calculated by multiplying price by quantity, a decrease in quantity demanded by 10% would more than offset the 5% increase in price, resulting in a fall in total revenue. Therefore, the correct answer is (C) 10% decrease in customers and a fall in total revenue.

A Local Restaurant Has Estimated That the Price Elasticity of Demand