Question

A pizzeria currently sells pepperoni pizzas at a price of$12.00 each. The pepperoni pizzas are becoming popular with customers, and so the pizzeria owner is considering raising the price.

a) if the price increase will cause the demand elasticity to change from -2.5 to -2.0 what should the price be?

b) what percentage of customers must be retained to ensure that the price increase is profitable?

Answer 1

a)

Since here demand is elastic or elasticity of demand is greater than unity. Thus, if firm effects rise in price, it would invariably cause fall in total revenue of firm. 1 % rise in price would cause 2 % fall in quantity demanded. Thus, rising price would not be profitable for firm. popularity of pizza has increased demand and reduce elasticity but still it is higher than unity.

b)

1 % rise in price should not cause fall in customer more than 1 %. Fall in customer must be less than 1 %, in order to make such price rise profitable.