Question

Barney owns a bagel business in New York City and he wants to increase his total revenue. He knows that, when bagels are $1, he sells 250 an hour, and when he lowers the price to $0.75, he sells 275 an hour.

a. Calculate the price elasticity of demand for Barney’s bagels.

b. Using the price elasticity of demand for Barney’s bagels, explain whether he should raise or lower the price to generate more revenue.

c. A bakery moves in across the street from Barney’s shop. Explain what is likely to happen to the price elasticity of demand for Barney’s bagels.

Answer 1