Ali's Gyros operates near a college campus. Ali has been selling 120 gyros a day at $4.50 each and is considering a price cut. He estimates that he would be able to sell 200 gyros per day at $3.50 each. a. Calculate the price elasticity of demand using the midpoint formula. b. Calculate the change in revenue as a result of the price cut.
Ali's Gyros operates near a college campus. Ali has been selling 120 gyros a day at $4.50 each and is considering a price cut. He estimates that he would be able to sell 200 gyros per day at $3.50 each.
a. Calculate the
b. Calculate the change in revenue as a result of the price cut.
a. The price elasticity of demand using the midpoint formula (Arc Ed)
Arc Ed = [(Qd2 – Qd1) / midpoint Qd] ÷ [(P2 – P1) / midpoint P]
Midpoint Qd = (Qd1 + Qd2) / 2
= (120 + 200) / 2
= 160
Midpoint Price = (P1 + P2) / 2
= (4.50 + 3.50) / 2
= 4
Arc Ed = [(200 - 120) / 160] ÷ [(3.50 - 4.50) / 4]
= (80 / 160) ÷ (-1 / 4)
= 0.5 ÷ -0.25
= 2
(The negative sign is ignored, since we’re concerned with the absolute values in price elasticity.)
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