According to a company news release, during the third quarter of 2014, the Coca-Cola Company sold 1 percent less soda in North America while earning more revenue.

Source: The Coca Cola Company, "The Coca-Cola Company Reports Third Quarter and Year-To-Date 2014 Results," October 21, 2014.

a. During this period, Coke must have _____ its soda prices.

b. Based on this information, the demand for Coke is price

A. elastic because Coke's revenue increased following an increase in price.

B. inelastic because Coke's revenue decreased following an increase in price.

C. elastic because Coke's revenue increased following a decrease in price.

D. inelastic because Coke's revenue increased following an increase in price.

According to a company news release, during the third quarter of 2014, the Coca-Cola Company sold 1 percent less soda in North America while earning more revenue.

Source: The Coca Cola Company, "The Coca-Cola Company Reports Third Quarter and Year-To-Date 2014 Results," October 21, 2014.

a. During this period, Coke must have raised its soda prices.

b. Based on this information, the demand for Coke is price

A. elastic because Coke's revenue increased following an increase in price.

B. inelastic because Coke's revenue decreased following an increase in price.

C. elastic because Coke's revenue increased following a decrease in price.

D. inelastic because Coke's revenue increased following an increase in price.

According to the law of demand, if a firm raises its price it will sell fewer units. In this case though, Coke raised their price and earned more revenue. This occurred because the demand for Coke at their current price level was inelastic. This means that the % change in price was higher than the % fewer units of soda sold. In other words, they raised the price by more than 1% and consumers only cut back by 1%, which leads to an increase in revenue.

The answer to question b is D. This is consistent with the revenue test of elasticity. The revenue test of elasticity is what makes elasticity such a powerful idea for businesses. If a firm raises its prices and finds that it earns an increase in revenue, the demand is inelastic, which is true in Coke's case. Firms facing an inelastic demand curve should raise their price if they want to earn more revenue because the drop in sales will be proportionally smaller than the price increase. On the other side of this, if a firm lowers its price and finds it earned more revenue, then it faces an elastic demand. In order to earn more revenue, firms in those markets should lower their prices. Answer C is consistent with the revenue test, but didn't happen in this case study. Answers A and B are incorrect because they are inconsistent with the revenue test's outcome in the real world.