A company provides meal services to 5000 customers a month, at acost $17.50 per meal....

A company provides meal services to 5000 customers a month, at a cost $17.50 per meal. The company has supply issues and has to raise the cost per meal to $20.00. As a result, sales drop 5%. Based on this, the meal service is elastic.

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Expert Solution

Answer is False.

Elasticity of meal service = % change in quantity demanded / % change in price.

% change in quantity demanded = 5%

% change in price = 20-17.50 *100/ 17.50

= 2.50 *100 / 17.50

= 250/17.50

= 14.28%

Elasticity = 5 % / 14.28% = 0.35

When value of elasticity is less than one, it is called inelastic.

When value of elasticity is more than one, it is called elastic.

When value of elasticity is equal to one, it is called unit elastic.

Here value is less than one, so it is inelastic.

So it is not elastic.

Rahul Sunny answered 1 year ago

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