Answered: Daffy’s is a pet care company that…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

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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