Suppose you are the manager of a restaurant that serves an average of 400 meals per day at an average price per meal of $20. On the basis of a survey, you have determined that reducing the price of an average meal to $18 would increase the quantity demanded to 450 per day.

1. Compute the price elasticity of demand between these two points.

2 Would you expect total revenues to rise or fall? Explain.

3 Suppose you have reduced the average price of a meal to $18 and are considering a further reduction to $16. Another survey shows that the quantity demanded of meals will increase from 450 to 500 per day. Compute the price elasticity of demand between these two points.

4 Would you expect total revenue to rise or fall as a result of this second price reduction? Explain.

5 Compute total revenue at the three meal prices. Do these totals confirm your answers in (b) and (d) above?