Question

A local pizzeria sells 500 large pepperoni pizzas per week at a price of $20 each. Suppose the owner of the pizzeria tells you that the price elasticity of demand for his pizza is -3, and he asks you for advice. He wants to know two things. First, how many pizzas will he sell if he cuts his price by 10%? Second, how will his revenue be affected?

If he cuts his price by 10%, his sales will increase to___ pizzas, and his total revenue will increase to $____

Answer 1

Answer on Question 70387-Economics - Microeconomics

A local pizzeria sells 500 large pepperoni pizzas per week at a price of $20 each. Suppose the owner of the pizzeria tells you that the price elasticity of demand for his pizza is -3, and he asks you for advice. He wants to know two things. First, how many pizzas will he sell if he cuts his price by 10%? Second, how will his revenue be affected?

If he cuts his price by 10%, his sales will increase to ___ pizzas, and his total revenue will increase to $ ___

Answer.

The point price elasticity of demand is calculated as

$$K_d = \frac{\Delta Q}{Q1} \cdot \frac{\Delta P}{P1}$$

So,

$$K_d = \frac{\Delta Q}{Q1} \cdot 0.1 = -3, \Rightarrow \frac{\Delta Q}{Q1} = -0.3$$

So, the quantity increases by 30%.

If he cuts his price by 10%, his sales will increase to 500*1.3=650 pizzas, and his total revenue will increase to 650*($20*0.9)=$11,700

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