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Analysis of Pricing: You manage Mt. Claire Café which sells meals at a price of $8.50 each. The meal includes a hot dish and a beverage of your choice. The average number of meals sold per month is 21,000. The owners of Mt. Claire Café would like to increase its sales and profits. They know that if price is lowered, they will sell more meals. So they run an experiment. Price is lowered to $7.50 per meal in March and the number of meals sold increases to 23,000.
What is the Price Elasticity of Demand?
Is elasticity elastic, inelastic or neither?
What does this mean and why does it matter?
Will Revenues increase or decrease as a result of the price cut? By How much?
Beatrice has calculated the fixed costs for the Café are $18,000 per month and each meal costs $4.50. Will profits go up or down as a result of the price cut? By How much?
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