Question

A fruit stand manager has estimated that the price elasticity of demand for exotic fruits is 2. If the fruit stand increases menu prices by 5%, she can expect the quantity of exotic fruit sold to decrease. Calculate the expected percentage change in quantity demanded.

Answer 1

The price elasticity of demand for exotic fruits is 2, so a 5% increase in price is expected to result in a 10% decrease in quantity demanded.

Step-by-step explanation:

The price elasticity of demand measures how sensitive the demand for a product is to changes in its price. In this case, the fruit stand manager estimates that the price elasticity of demand for exotic fruits is 2. This means that a 1% increase in price will result in a 2% decrease in quantity demanded (and vice versa).

If the fruit stand increases menu prices by 5%, we can use the estimated price elasticity of demand to calculate the expected percentage change in quantity demanded. Since the elasticity is 2, we can multiply it by the percentage change in price (5%) to get the expected percentage change in quantity demanded, which would be 10%. Therefore, the fruit stand can expect the quantity of exotic fruit sold to decrease by 10%.