Final answer:
The bubble tea shop should maintain or potentially increase the current price for their teas in order to maximize revenue, depending on the elasticity of demand for their product.
Step-by-step explanation:
If a bubble tea shop is considering how to increase profits with the given scenario that producing each additional tea costs them $0.95, and lowering the price would reduce their revenues, I would advise against lowering the price.
Since the cost to produce an extra tea is known, and lowering the price would decrease revenue, it can be inferred that the current price is above the unit cost but is close to the elasticity point where demand begins to become sensitive to price changes.
Therefore, the bubble tea shop should either maintain the current price or consider an increase in price to offset the decrease in quantity sold. This recommendation holds if the demand for their product is inelastic at the current price, meaning that a higher price will not significantly reduce the quantity sold.
However, if the demand is elastic, increasing the price could lead to a disproportionate decrease in quantity demanded, potentially reducing total revenue.
This strategy of maintaining or increasing the price aligns with the law of demand and supply, which implies that if a product is priced too low relative to its cost, the incentive for the shop to produce can lessen, leading to disequilibrium.