Question

7.You manage a popular malt shop and lately revenues have been disappointing. Your friendsuggests that raising soda prices will increase revenues, but your waitress suggests thatdecreasing soda prices will increase revenues. You aren't sure who is right, but you do knowthat:a. your friend thinks the demand for sodas is elastic, while your waitress thinks the demandfor sodas is inelastic.b. your friend thinks the demand for sodas is inelastic, while your waitress thinks thedemand for sodas is elastic.c. both the friend and waitress think the demand for sodas is elastic.d. both the friend and waitress think the demand for sodas is inelastic.e. your friend thinks the demand curve for sodas is nearly horizontal, while your waitressthinks the demand curve is nearly vertical.

Answer 1

Answer: The answer is (e) your friend thinks the demand curve for sodas is nearly horizontal, while your waitress thinks the demand curve is nearly vertical.

Explanation: The difference between the two suggestions is whether the demand for sodas is elastic or inelastic. Elastic demand means that a small change in price will result in a large change in the quantity demanded, while inelastic demand means that a change in price will result in only a small change in the quantity demanded.

Your friend's suggestion that raising prices will increase revenues implies that the demand for sodas is elastic, while your waitress's suggestion that decreasing prices will increase revenues implies that the demand for sodas is inelastic.

The statement that your friend thinks the demand curve for sodas is nearly horizontal suggests that your friend believes that a small change in price will lead to a large change in the quantity demanded, which is a characteristic of elastic demand. Conversely, the statement that your waitress thinks the demand curve is nearly vertical suggests that your waitress believes that a change in price will result in only a small change in the quantity demanded, which is a characteristic of inelastic demand.