The South Beach Café recently reduced appetizer prices from $10 to $8 for afternoon “early bird” customers and enjoyed a resulting increase in sales from 75 to 125 orders per day. Beverage sales also increased from 400 to 550 units per day.
Calculate the price elasticity of demand for appetizers. Is demand for appetizers elastic or inelastic?
Calculate the cross price elasticity of demand between beverage sales and appetizer prices. What does this tell us about the relationship between appetizers and beverages?
Holding all else equal, would you expect an additional appetizer price decrease to cause both appetizer and beverage revenues to rise? Explain.