A firm that produces yoghurt is given the following information the price elasticity of demand of various flavours: Strawberry (-0.8), Vanilla (-1.0), Pineapple (-2.5). Explain the pricing policy that the firm should adopt for each of the flavours if it wants to increase total revenue. [8]

In regards to the Strawberry flavour, the relatively low value indicates price inelastic demand, thus the firm can expect to be able to raise the price while in order to increase total revenue, as, due to the low elasticity, the increased revenue from the price increase will outweigh the fall in consumption resulting from it, thus increasing total revenue. As the value for the price elasticity is relatively close to unitary elasticity however, it might also be advisable to also adopt non-price strategies such as increased spending on advertising to further lower the price elasticity to demand.

The Vanilla flavour shows to have unitary elasticity, meaning that any change in price will have a perfectly proportional effect on consumption. By extension, this means that regardless of the changes in price, the total revenue will remain constant. As such, in order to increase total revenue, the firm must first adopt non price strategies such as increased spending on marketing in order to either change the price elasticity of demand first and then adjust the pricing accordingly, or, shift the entire demand curve to the right in order to increase the quantity demanded at all price levels and as such increase revenue by increased sales.

Pineapple appears to have a very high price elasticity of demand, meaning that consumers will have a very large increase in consumption following a change in the price. Thus, in order to increase total revenue the firm should attempt to lower the price of pineapple flavoured yoghurt as this would lead to an increase in consumption that would more than make up for the lost per unit revenue resulting from the price drop, and in turn increase total revenue.