Question

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 for each product can the firm implement to increase profit?

b) Why would your recommendation increase profits? (What't the underlying economic thinking?)

Answer 1

A) Nornally price charged is P=MR/(1-1/e)

Clearly higher elasticity should have lower price and lower elasticity should have high price.

Thus High quality Microbrew should be charged at higher price and Low Brow should be charged low price in order to maximise revenue and profit.

B) profit is maximised when MR=MC and firm should charge price according to equation specified in first part.Thus profit is imcreased when when you charge price according to first.