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If the local pizzeria raises the price of a medium pizza from Rs. 60 to Rs. 100 and quantity demanded falls from 700 pizzas a night to 100 pizzas a night, the arc price elasticity of demand for pizzas is
- a)0.67
- b)1.5
- c)2.0
- d)-3.0
Correct answer is option 'D'. Can you explain this answer?
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Calculation of Arc Price Elasticity of Demand
The formula for arc price elasticity of demand is:
Arc Price Elasticity of Demand = ((Q2-Q1)/((Q2+Q1)/2))/((P2-P1)/((P2+P1)/2))
where
Q1 = initial quantity demanded = 700
Q2 = new quantity demanded = 100
P1 = initial price = Rs. 60
P2 = new price = Rs. 100
Using the values in the formula, we get:
Arc Price Elasticity of Demand = ((100-700)/((100+700)/2))/((100-60)/((100+60)/2))
= (-600/400)/((40)/80)
= -1.5/-0.5
= 3.0
Interpretation of Arc Price Elasticity of Demand
The arc price elasticity of demand is a measure of the responsiveness of quantity demanded to a change in price. A value of 3.0 means that for every 1% increase in price, quantity demanded falls by 3%. This indicates that the demand for pizzas is highly elastic, which means that consumers are sensitive to changes in price.
Implications for the Pizzeria
The pizzeria should be cautious about raising prices too high, as it may result in a significant decrease in demand. In this case, the pizzeria experienced a 600% decrease in quantity demanded as a result of a 67% increase in price. The pizzeria may need to consider alternative strategies, such as reducing costs or offering promotions, in order to maintain or increase sales.
The formula for arc price elasticity of demand is:
Arc Price Elasticity of Demand = ((Q2-Q1)/((Q2+Q1)/2))/((P2-P1)/((P2+P1)/2))
where
Q1 = initial quantity demanded = 700
Q2 = new quantity demanded = 100
P1 = initial price = Rs. 60
P2 = new price = Rs. 100
Using the values in the formula, we get:
Arc Price Elasticity of Demand = ((100-700)/((100+700)/2))/((100-60)/((100+60)/2))
= (-600/400)/((40)/80)
= -1.5/-0.5
= 3.0
Interpretation of Arc Price Elasticity of Demand
The arc price elasticity of demand is a measure of the responsiveness of quantity demanded to a change in price. A value of 3.0 means that for every 1% increase in price, quantity demanded falls by 3%. This indicates that the demand for pizzas is highly elastic, which means that consumers are sensitive to changes in price.
Implications for the Pizzeria
The pizzeria should be cautious about raising prices too high, as it may result in a significant decrease in demand. In this case, the pizzeria experienced a 600% decrease in quantity demanded as a result of a 67% increase in price. The pizzeria may need to consider alternative strategies, such as reducing costs or offering promotions, in order to maintain or increase sales.
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If the local pizzeria raises the price of a medium pizza from Rs. 60 to Rs. 100 and quantity demanded falls from 700 pizzas a night to 100 pizzas a night, the arc price elasticity of demand for pizzas isa)0.67b)1.5c)2.0d)-3.0Correct answer is option 'D'. Can you explain this answer?
Question Description
If the local pizzeria raises the price of a medium pizza from Rs. 60 to Rs. 100 and quantity demanded falls from 700 pizzas a night to 100 pizzas a night, the arc price elasticity of demand for pizzas isa)0.67b)1.5c)2.0d)-3.0Correct answer is option 'D'. Can you explain this answer? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about If the local pizzeria raises the price of a medium pizza from Rs. 60 to Rs. 100 and quantity demanded falls from 700 pizzas a night to 100 pizzas a night, the arc price elasticity of demand for pizzas isa)0.67b)1.5c)2.0d)-3.0Correct answer is option 'D'. Can you explain this answer? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for If the local pizzeria raises the price of a medium pizza from Rs. 60 to Rs. 100 and quantity demanded falls from 700 pizzas a night to 100 pizzas a night, the arc price elasticity of demand for pizzas isa)0.67b)1.5c)2.0d)-3.0Correct answer is option 'D'. Can you explain this answer?.
If the local pizzeria raises the price of a medium pizza from Rs. 60 to Rs. 100 and quantity demanded falls from 700 pizzas a night to 100 pizzas a night, the arc price elasticity of demand for pizzas isa)0.67b)1.5c)2.0d)-3.0Correct answer is option 'D'. Can you explain this answer? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about If the local pizzeria raises the price of a medium pizza from Rs. 60 to Rs. 100 and quantity demanded falls from 700 pizzas a night to 100 pizzas a night, the arc price elasticity of demand for pizzas isa)0.67b)1.5c)2.0d)-3.0Correct answer is option 'D'. Can you explain this answer? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for If the local pizzeria raises the price of a medium pizza from Rs. 60 to Rs. 100 and quantity demanded falls from 700 pizzas a night to 100 pizzas a night, the arc price elasticity of demand for pizzas isa)0.67b)1.5c)2.0d)-3.0Correct answer is option 'D'. Can you explain this answer?.
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If the local pizzeria raises the price of a medium pizza from Rs. 60 to Rs. 100 and quantity demanded falls from 700 pizzas a night to 100 pizzas a night, the arc price elasticity of demand for pizzas isa)0.67b)1.5c)2.0d)-3.0Correct answer is option 'D'. Can you explain this answer?, a detailed solution for If the local pizzeria raises the price of a medium pizza from Rs. 60 to Rs. 100 and quantity demanded falls from 700 pizzas a night to 100 pizzas a night, the arc price elasticity of demand for pizzas isa)0.67b)1.5c)2.0d)-3.0Correct answer is option 'D'. Can you explain this answer? has been provided alongside types of If the local pizzeria raises the price of a medium pizza from Rs. 60 to Rs. 100 and quantity demanded falls from 700 pizzas a night to 100 pizzas a night, the arc price elasticity of demand for pizzas isa)0.67b)1.5c)2.0d)-3.0Correct answer is option 'D'. Can you explain this answer? theory, EduRev gives you an
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