The owner of a restaurant is considering lowering menu prices to draw in more customers. He is debating between lowering the price for the steak entrée or the salmon entrée. When he lowered prices last year, a $2.00 decrease in price for the $15

Question

steak resulted in a growth in steak sales from 75 per week to 100 per week. A $2.50 decrease in the price of the $17 salmon entrée increased sales from 40 to 75 meals per week. Which entree should he choose to put on sale?

Please provide the best answer for the statement.

Answer 1

With a $2.00 decrease in price for the steak entrée and a 25-unit increase in demand, according to the midpoint formula, the price elasticity of demand for the steak is 2.43. With a $2.50 decrease in price for the salmon entrée and a 35-unit increase in demand, the price elasticity of demand according to the midpoint formula is 3.96. This means that the demand for salmon is much more sensitive to price than that of the steak entrée. Thus, the price decrease on the salmon entrée will result in a greater increase in demand than the same percentage price increase on the steak entrée. Also a decrease in the price of the salmon will produce a greater increase in revenues. The $2.00 decrease in price of the steak will increase revenues from $1125 to $1,300. Added to total revenues from sales of salmon at the regular price ($17 x 40 = $680), total revenues equal $1,980. The $2.50 decrease in salmon would increase revenues from $680 to $1,162. Added to the total sales of steaks at the regular price ($15 x 75 = $1,125), total revenues equal $2,287. Thus, to draw in more customers and gain greater revenue, the restaurant owner should lower the price of the salmon.