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In: Economics

A local pizzeria sells 500 large pepperoni pizzas per week at a price of $20 each....

A local pizzeria sells 500 large pepperoni pizzas per week at a price of $20 each. Suppose the owner of the pizzeria tells you that the price elasticity of demand for his pizza is -2, and he asks you for advice. He wants to know two things. First, how many pizzas will he sell if he cuts his price by 10%? Second, how will his revenue be affected?

If he cuts his price by 10%, his sales will increase to ___ pizzas, and his total revenue will increase to $___.

Solutions

Expert Solution

Answer : Elasticity of demand =-2

Ed = -2

% Change in quantity demanded /% Change in price = -2

-2 = % Change in quantity demanded/-10%

20% increase in quantity demanded for pizza

If he cuts price by 10% his sales increased to 600 pizzas and his total revenue from 600 pizzas is (600*$18)=$10,800 where as total revenue from 500 pizzas (500*$20)=$10,000.  

Rahul Sunny answered 2 years ago
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