Question

The Loft is one of the options for students at USI to get a quick and tasty meal at reasonable prices. They wanted to raise prices but did not know if the demand would fall off too much.

They decided to raise prices and wait and see before making the increases permanent. In the first week after they raised prices on the menu an average of 10%, they served fewer lunches but their revenue did not fall.

Based on this, they decided to keep the new menu. Would you expect revenue to continue at this level?

Answer 1

Ans.

To know revenue will continue at this level there is need to determine elasticity of demand. Which measure responsiveness of changes in quantities to changes in prices. According to the question Loft increased its prices at average of 10% but revenue did not fall but quantity fell. That means price effect outweigh quantity effect that causes revenue to increase. Price effect is with increase in prices revenue increase on units sold and quantity effect is with increased prices, few units are sold out. It gives inelastic demand curve as revenue gained from higher price outweighs revenue lost from lesser lunches served. Such that revenue will increase and continue at this level. So rise in price lead to rise in revenue.