Ali's Gyros operates near a college campus. Ali has been selling 120 gyros a day at $4.50 each and is considering a price cut. He estimates that he would be able to sell 200 gyros per day at $3.50 each
a. Calculate the price elasticity of demand using the midpoint formula.
b. Calculate the change in revenue as a result of the price cut.
a. Price elasticity of demand = (120 - 200 ) / [(200 + 120 ) / 2] / (4.50 - 3.50 ) / 3.50 + 4.50 ) / 2] = (-80 / 160 ) / (1 / 4 ) = -2
b. Change in revenue = $700 - $540 = $160
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