1. A manager for a beer company is trying to determine how much to charge for beer in vending machines on a campus. The beer company has an exclusive contract with the campus and needs to determine the optimal pricing level. Weekly demand over the last year is estimated to be Q = 5000 - 2500P. Currently, the company charges $0.75 per unit.
a. What is the elasticity of demand at the current price level?
b. Is the current price level profit-maximizing?
c. If the manager wants to maximize revenue, what price level should the beer company charge?
d. What is the elasticity of demand at the revenue maximizing price?
e. If the firm wants to maximize profits, should it charge a price that is higher, equal to, or lower than the answer for Part C.
f. Assume that a year later the campus has dramatically increased enrollment, so that demand has increased to Q = 5500 - 2500P. What price should the beer company now charge to maximize revenues?