A restaurant manager has estimated that the price elasticity of demand for meals is 2. If the restaurant increases menu prices by 5%, she can expect the number of meals sold 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

The price elasticity of demand is 2, meaning demand is elastic. A 5% increase in price will lead to a 10% decrease in quantity demanded (5% * 2). Since demand is elastic, total revenue will fall when prices increase.

A Restaurant Manager Has Estimated That the Price Elasticity of Demand