The first step in making recommendations to the coffee shop is to determine if the elasticity of demand is considered elastic or inelastic. If the elasticity is greater than one, then the demand is considered elastic. When the elasticity is less than 1, the elasticity is considered in inelastic. Since the problem states the known elasticity of demand is 0.2, then we are evaluation an inelastic demand.
With an inelastic demand, the changes in price have a much smaller impact on the quantity demanded. This is illustrated in slide 11 of the Attend Section of Week 3. In fact, the total revenue will increase due to the minor changes in pricing. Therefore, I would recommend the coffee shop increase its price of coffee.
With an inelastic demand, the changes in price have a much smaller impact on the quantity demanded. This is illustrated in slide 11 of the Attend Section of Week 3. In fact, the total revenue will increase due to the minor changes in pricing. Therefore, I would recommend the coffee shop increase its price of coffee.