Question

In: Economics

Suppose Big Barrel Beer, Inc. produces two products using essentially the same production methods

Suppose Big Barrel Beer, Inc. produces two products using essentially the same production methods (i.e., the costs of manufacturing the two products are identical.) High Quality Microbrew which has a price elasticity of demand of 0.2 and LowBrow/LowCal Beer which has a price elasticity demand of 5.5.

a) Suppose current policy is to charge the same price per 6-pack for each beer, what pricing changes can the firm implement to increase profit?



b) Why would your recommendation increase profits? (What' is the underlying economic thinking?)

Solutions

Expert Solution

a) The pricing change would include the following- increase the price of high quality microbrew and decrease the price of lowbrow/low cal beer.

b) The price elasticity of demand for microbrew is 0.2 which means the demand is highly inelastic. Thus increasing the price will not decrease the quantity demanded proportionately more. The profit will increase drastically.

The price elasticity of demand for lowcal beer is 5.5 which means the demand is highly elastic. Thus if price is decreased even a little bit, the quantity demanded will increase drastically. This will increase the profit very much.

Hence, increase in the price of high quality beer and decreasing the price of lowcal beer will increase profits.


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