Assume that the demand for Starbucks coffee is elastic. Should Starbucks increase or decrease the price...

Assume that the demand for Starbucks coffee is elastic. Should Starbucks increase or decrease the price of their coffee in order to bring in more total revenue. Please explain your answer

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Expert Solution

We know that economists compute the elasticity as

the percentage change in quantity demanded divided by the percentage change in price

Here, as the demand for Starbucks coffee is elastic; therefore, the percentage change in quantity demanded is greater than the percentage change in price.

As the demand for Starbucks coffee is elastic, then if Starbucks cuts its price, the percentage fall in price will result in an even larger percentage increase in the quantity demanded — thus raising the amount of total revenue.

Therefore, Starbucks should decrease its coffee price to increase their total revenue as its demand is elastic.

As the figure clearly shows that when there is a decrease in the price of Starbucks,

The loss in total revenue resulting from the reduced price will be lower than the increase in total revenue resulting from the reduced price.

Therefore, it completely makes sense that Starbucks, with its elastic demand, should decrease its coffee price to increase their total revenue.

Rahul Sunny answered 1 year ago

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