A Smoothie King manager has estimated that the price elasticity of demand for exotic fruit smoothies is 2. If the store increases menu prices by 5%, she can expect the quantity of exotic fruit smoothies sold to decrease by _____ and total revenue to _____.
A)10%; rise
B)5%; stay constant
C)10%; fall
D)2.5%; fall

Question

Quizplus · Accepted Answer

The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. In this case, we know that the price elasticity of demand for exotic fruit smoothies is 2.

If the store increases menu prices by 5%, we can expect the quantity demanded of exotic fruit smoothies to decrease by 10% (2 x 5%). This means that for every 1% increase in price, quantity demanded will decrease by 2%.

Since demand is elastic, if price increases, total revenue will decrease. This means that total revenue will fall when the store increases menu prices by 5%. Hence, the best choice is C.

A Smoothie King Manager Has Estimated That the Price Elasticity