Question

“Perhaps most interesting is that Chipotle made a choice that consumer goods companies so far have been unwilling to make: The chain Chipotle was willing to raise prices and sacrifice traffic in the name of profitability. Prices rose around 5 percent, but total revenue rose only 2.2 percent — meaning traffic declined.” April 27, 1919 Bloomberg View By “traffic” they mean quantity demanded. What does this imply about the price elasticity of demand for Chipotle? Explain. (Think before you start writing. What is the relationship between price elasticity and the effect of price changes on total revenue?)

Answer 1

Change in price impacts the total revenue based on the price elasticity of demand for a good.

If demand for a good is elastic then an increase in price leads to decrease in total revenue and a decrease in price leads to increase in total revenue.

On the other hand, if demand for a good is inelastic then an increase in price leads to an increase in total revenue and a decrease in price leads to a decrease in total revenue.

Chipotle has raised price. This increase in price has resulted in an increase in the total revenue.

So,

This implies that demand for Chipotle is inelastic.