Anna owns the Sweet Alps Chocolate store. She charges $10 per pound for her hand made chocolate. You, the economist, have calculated the elasticity of demand for chocolate in her town to be 2.5. If she wants to increase her total revenue, what advice will you give her and why? Use diagrams and economic terms to explain your answer.

Decrease her prices.

Explanation:

The elasticity of demand shows the change in quantity demanded as a result of a change in price.

In this case, if price decreases by 1%, quantity demanded for chocolate would increase by 2.5%.

If she wants to increase her revenue therefore, she should decrease the price.

For example:

If the demand was 10 chocolate bars a day, she would earn:

= 10 * 10

= $100 a day

If she decreased the price by 10%, price would be:

= 10 * ( 1 -10%)

= $9.00

Quantity demanded would be:

= 10 * (1 + 25%)

= 12.5 bars

Revenue would become:

= 12.5 * 9

= $112.50 which is more than the previous $100 she was making.

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