In: Economics
Bon Appétit is a French restaurant that recently increased the
average price of its
meals by 4%. As a result, the number of customers dropped by 3%.
Based on this
information, what is the price elasticity of demand for meals at
Bon Appétit? How
will this 4% increase of the average price of meals impact total
revenue at Bon
Appétit?
(10 points)
Another French restaurant in the area that competes with Bon
Appétit decided to
reduce the average price of its meals by 3%. How will this decision
likely impact
the demand for meals at Bon Appétit?
(5 points)
Assume that the average disposable income in the area in which
operates
increases by 5% over the last year. As a result, the number of
customers at Bon
Appétit increased by 3%. Based on this information, what is the
income elasticity
of demand for meals at
Bon Appétit? Are meals at Bon Appétit considered normal
goods?
(10 points)
1st part:
Price elasticity of demand of B.A. = (Percentage change in quantity demand) / (Percentage change in price)
= (+ 4%) / (- 3%)
= - 1.33 (Answer)
Since the elasticity is more than 1, the demand of meal is elastic.
2nd part:
Total revenue (TR) = Price × Quantity
TR and price elasticity are directly related, because they both deal with price and quantity. Since the above demand is elastic, only the dropping of price can increase TR in bigger amount. Here the price increases which mean total revenue will go down drastically.
3rd part:
The meal of a competitor is substitute good. If its price drops its demand will increase but the demand of the meal of B.A. will decrease. It happens because BA’s product is costlier than competitor’s product; and customers will certainly not go for costly items.
4th part:
Income elasticity of demand = = (Percentage change in quantity demand) / (Percentage change in income)
= (+ 3%) / (+ 5%)
= 0.6 (Answer)
5th part:
Since the income elasticity (0.6) is positive, meals are normal goods. More specifically these are necessity goods.