Question

A local pizzeria charges $10 for a pizza. The owner of the pizzeria wants to increase the company's total revenue. A recent market research shows that the price elasticity of demand for his pizzas is -2. What pricing strategy would you recommend to increase revenue?

Answer 1

To increase revenue at a pizzeria with a price elasticity of demand of -2, the owner should reduce the price of the pizza, embracing the elasticity to generate a larger increase in quantity demanded relative to the price cut.

Step-by-step explanation:

The pizzeria owner wants to increase total revenue and the price elasticity of demand for the pizzas is -2, which indicates a highly elastic demand. In circumstances of elastic demand, the recommended pricing strategy is to decrease the price, as the percentage drop in price will lead to a proportionally larger percentage increase in the quantity demanded, thereby increasing total revenue.

The concept can be illustrated using the price elasticity of demand formula: Percentage Change in Quantity Demanded / Percentage Change in Price = Elasticity. Since the elasticity is -2, for a price reduction, the quantity demanded will increase proportionally more than the price decrease, making this strategy effective for revenue growth.