Should magee increase or decrease the price of pie

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Magee's Bakery, in downtown Lexington, estimates that its demand for transparent pies has a price elasticity of 1:5.

a. Suppose Magee's were to increase its price. In which direction would each of the following move: revenue, total costs, prot? For each, answer \increase", \decrease", or \uncertain", along with a brief explanation.

b. Suppose Magee's were to decrease its price. In which direction would each of the following move: revenue, total costs, prot? For each, answer \increase", \decrease", or \uncertain", along with a brief explanation.

c. Finally, suppose for part c only that you now have the additional information that the marginal cost to Magee's of making one transparent pie is $2 (and is constant). Magee's currently charges $5 for each transparent pie. Should they increase or decrease this price, or should they leave it at $5?

Reference no: EM13209456

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