Question

UW Dining is thinking about increasing the amount of meals they sell from 10,000 to 12,000 . In order to increase the number of students buying meals, UW will decrease the price of a meal from $10 to $9.

a. What is the price elasticity of demand (make sure to show your calculation)?

Answer 1

The price elasticity of demand measures the responsiveness of quantity demanded to a change in price. To calculate it, you need to compare the percentage change in quantity demanded to the percentage change in price. In this case, the price elasticity of demand is 2.27.

Step-by-step explanation:

The price elasticity of demand measures the responsiveness of quantity demanded to a change in price. It is calculated using the formula:

Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)

Given that the price of the meal decreased from $10 to $9, the percentage change in price can be calculated as:

% Change in Price = ((New Price - Old Price) / Old Price) x 100

% Change in Price = ((9 - 10) / 10) x 100

% Change in Price = -10%

To find the percentage change in quantity demanded, we can use the information provided in the question, which states that a 10% increase in price leads to a 22.7% decrease in quantity demanded. As the price is decreasing by 10%, we can infer that the percentage change in quantity demanded is also -22.7%.

Substituting these values into the formula for price elasticity of demand:

Price Elasticity of Demand = (-22.7% / -10%)

Price Elasticity of Demand = 2.27