Question 5

The Sugar Plum Inn had an average dinner cover charge of $8.75 during the month of July when 3,000 patrons were served. The owner increased the dinner menu prices by an average of $0.50 per item. In August, the restaurant served 2,900 guests with an average cover charge of $9.25.

(a) Calculate the price elasticity of demand for The Sugar Plum Inn (2 points)

(b) Based on the calculated price elasticity of demand, state an implication certified with an additional calculation (2 points)

• Hint. Did the elasticity of demand influence the business? If it did, did you find a positive or negative effect? How can you verify your argument?

question 6

The Eastpoint Cafe average lunch sells for $12 with an average variable cost of $8. The cafe plans to advertise a Monday lunch special for $11. The special would cost Eastpoint Cafe $7.75 per meal. An ad to promote this special would cost the cafe $200.

(a) What is the contribution margin and contribution margin ratio of the cafe average lunch? (2 points)

(b) What is the contribution margin and contribution margin ratio of the proposed Monday special? (2 points)

(c) How many lunch covers must be sold to cover the lunch special promotion? (2 points)