The president of the Micro Brewing Corporation asks you, as the company economist, to forecast changes in consumer beer purchases associated with a proposed price change. You conduct a survey and find that if the price of a six-pack increases from $5.50
to $7.50, the quantity demanded will decrease from 2200 units to 1800 units a month. Should the Micro Brewing Corporation raise its price? Explain the economic basis for this recommendation to the president.
Please provide the best answer for the statement.
Yes, the corporation should increase the price of a six-pack. Over the price range considered, the price elasticity of demand coefficient is 0.65, or inelastic, using the midpoints formula. An increase in price when demand is inelastic will increase total revenue. This increase in total revenue also can be shown by multiplication. With a price of $5.50 times a quantity of 2200 per month, the total revenue was $12,100. With the higher price of $7.50 times a lower quantity of 1800, the total revenue is $13,500. Thus, there is a gain of $1400 in total revenue from raising the price.
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