In: Economics
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?)
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.