Question

Q5) A café company recently reduced it appetizer prices from Rs 12 to Rs 10 for early bird customers and

enjoyed a resulting increase in sales from 90 to 150 orders per day. Beverage sales also increases from
300 to 600 units per day. (4)
a. Calculate the point price elasticity of demand for appetizers. (1)
b. Calculate the cross elasticity of demand between beverage sales and appetizer prices. (1)
c. Holding all else equal would you expect an additional appetizer price decrease to Rs 8 to cause
appetizer revenue to rise? Explain with a diagram.

Answer 1

* Appetizer price decreased from Rs 12 to Rs 10, a 16.7% decrease [(12 - 10)/12]

* Appetizer demand increased from 90 to 150 orders per day, a 66.7% increase [(150 - 90)/90]

* Point price elasticity of demand = % change in quantity / % change in price = 66.7% / -16.7% = -4

* Beverage sales increased from 300 to 600 units per day, a 100% increase

* Cross elasticity of demand = % change in beverage quantity / % change in appetizer price

= 100% / -16.7% = -6

* c) If the price decreases further to Rs 8:

* Appetizer demand would likely increase further due to higher price elasticity of demand.

* However, revenue may not increase if the % increase in demand is less than the % decrease in price.

* This is illustrated on a demand curve diagram, where a further decrease in price leads to lower total revenue despite higher quantity demanded.

* So revenue may or may not rise depending on the relative size of the demand increase versus the price decrease.

Here is the diagram that was requested:

Price per appetizer

^

|

Rs 12 |

|

|

Rs 10 | D

|

|

Rs 8 |

Q1 Q2 Quantity of appetizers