Daffy’s is a pet care company that recently increased the average price of its services by 5%. As a result, the number of customers dropped by 4%. How will this 5% increase of the average price of services impact total revenue at Daffy’s?
Daffy’s is a pet care company that recently increased the average price of its services by 5%. As a result, the number of customers dropped by 4%. How will this 5% increase of the average price of services impact total revenue at Daffy’s?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Daffy’s is a pet care company that recently increased the average price of its services by 5%. As a result, the number of customers dropped by 4%. How will this 5% increase of the average price of services impact total revenue at Daffy’s?
Expert Solution
Introduction
The concept used here is of price elasticity of demand.
Price elasticity of demand refers to percentage change in quantity demanded to percentage change in price.
When the price elasticity of demand is inelastic in nature then increasing price, results in increase in total revenue. But when price elasticity of demand is elastic in nature, then increasing price, results in decline in total revenue.
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