Answer :
To determine when a price increase for Starbucks coffee will lead to an increase in revenue, we need to examine the concept of price elasticity of demand. This concept helps understand how the quantity demanded of a good responds to a change in price. Here's how each condition contributes to an increase in revenue:
Money spent on Starbucks coffee makes up a small share of total income:
If customers spend a small portion of their income on Starbucks coffee, they are less sensitive to price changes. In economic terms, the demand is inelastic, meaning a price increase will not lead to a significant reduction in quantity demanded, thereby increasing total revenue.
Starbucks coffee is more of a necessity than a luxury:
Necessities tend to have inelastic demand, as people consider them essential and are willing to pay higher prices even if they increase. If Starbucks coffee is viewed as a necessity, customers will continue purchasing despite price increases, again leading to higher revenues.
There are not many close substitutes for Starbucks coffee:
When there are few or no close substitutes, consumers do not have alternative coffee brands to switch to. This lack of substitutes makes the demand inelastic. With fewer substitutes, consumers are less likely to stop buying Starbucks coffee after a price rise, thus enhancing revenue.
In summary, all the conditions (1, 2, and 3) contribute to making the demand for Starbucks coffee inelastic. Therefore, a price increase under these conditions should lead to an increase in revenue, as the loss in sales volume will be proportionally smaller than the gain in revenue per unit. Hence, the correct choice is 4. All of these choices are correct.
Understanding these concepts helps businesses like Starbucks make informed pricing decisions to maximize revenue.
