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Question
Macroeconomics
Posted 10 months ago

Zikri wants to increase total revenue at his restaurant. The price elasticity of demand for several dishes that he serves are given in the table below.
\begin{tabular}{ll}
\multicolumn{3}{c}{\begin{tabular}{l} 
Price elasticity of demand of \\
Malaysian dishes
\end{tabular}} \\
Dish & Price elasticity of demand \\
\hline Nasi lemak & 0.7 \\
Satay & 2 \\
Rendang & 1 \\
Ulam & 1.4 \\
Pulut & 100
\end{tabular}

What dish should Zikri increase the price of if he wants to increase total revenue?

Choose 1 answer:
(A) Satay
(B) Nasi lemak
(C) Pulut
(D) Rendang
(E) Ulam
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Answer from Sia
Posted 10 months ago
Solution
a
Understanding Price Elasticity of Demand: Price elasticity of demand measures how the quantity demanded of a good responds to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. The formula is given by Ed=%ΔQd%ΔPE_d = \frac{\%\Delta Q_d}{\%\Delta P}
b
Interpreting Elasticity Values: If Ed<1E_d < 1, the demand is inelastic, meaning that the percentage change in quantity demanded is less than the percentage change in price. If Ed>1E_d > 1, the demand is elastic, meaning that the percentage change in quantity demanded is greater than the percentage change in price. If Ed=1E_d = 1, the demand is unit elastic
c
Total Revenue and Elasticity: Total revenue is maximized when the price is increased for goods with inelastic demand (Ed<1E_d < 1) because the decrease in quantity demanded will be proportionally less than the increase in price, leading to an overall increase in total revenue. Conversely, increasing the price of goods with elastic demand (Ed>1E_d > 1) will lead to a proportionally larger decrease in quantity demanded, thus reducing total revenue
d
Applying Elasticity to Zikri's Dishes: Based on the table provided, Nasi lemak has an elasticity of 0.7, which is inelastic. Increasing the price of Nasi lemak should lead to an increase in total revenue, as the percentage decrease in quantity demanded will be less than the percentage increase in price
Answer
(B) Nasi lemak
Key Concept
Inelastic Demand and Total Revenue
Explanation
Zikri should increase the price of Nasi lemak to increase total revenue because its demand is inelastic, meaning that the percentage decrease in quantity demanded will be smaller than the percentage increase in price, leading to higher total revenue.

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