Question

Sam owns a taco restaurant, and he conducted a consumer survey that indicates that the price elasticity of demand for his restaurant is 3.5. You would advise Sam to:

A) Increase prices to maximize revenue
B) Keep prices constant for optimal revenue
C) Decrease prices to maximize revenue
D) Close the restaurant due to low elasticity

Answer 1

With a price elasticity of demand of 3.5, Sam should decrease the prices at his taco restaurant to maximize revenue, as the demand is highly sensitive to price changes.

Step-by-step explanation:

If Sam's taco restaurant has a price elasticity of demand measured at 3.5, this indicates that the demand for the tacos is highly elastic. In other words, customers are very sensitive to price changes, and a small change in price will lead to a large change in the quantity demanded.

Given that the elasticity is significantly greater than 1, this would suggest that Sam should decrease prices to maximize revenue. This is because the percentage increase in quantity demanded from a price decrease will more than offset the percentage decrease in price, leading to an increase in total revenue.