The ACME Corporation determines that at current prices, the demand for its computer chips has a price elasticity of -2 in the short run, while the price elasticity for its disk drives is -1 a. If the corporation decides to raise the price of both products by 10 percent, what will happen to its sales? To its sales revenue? b. Can you tell from the available information which product will generate the most revenue? If yes, why? If not, what additional information do you need?

Microeconomics is a branch of economics that focuses on the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. One key aspect of microeconomics is understanding how consumers respond to price changes, which is essential for businesses when setting prices for their products or services. The role of microeconomics extends to analyzing market mechanisms that establish relative prices among goods and services and the allocation of limited resources among many alternative uses.

Understanding microeconomics provides the foundation for evaluating market conditions, which in turn can affect a company like ACME Corporation's strategies for pricing computer chips and disk drives. When firms grasp the principles of microeconomics, they can use this insight to make informed decisions that maximize profits and market shares while adhering to consumer demand and price sensitivities.

The demand response to price changes is a crucial concept in microeconomics and can be quantitatively measured by the price elasticity of demand. This metric encapsulates the consumer's sensitivity to price fluctuations concerning their consumption patterns. A higher price elasticity indicates that consumers will significantly reduce the quantity demanded in response to a price increase. In contrast, a lower price elasticity means that the change in quantity demanded will be relatively smaller.

In the instance of the ACME Corporation, the demand for computer chips is highly elastic with a price elasticity of -2, suggesting that consumers will significantly reduce their purchases if the prices rise. Conversely, disk drives have a price elasticity of -1, implying that the demand is less affected by price changes. It is indicative of the fact that disk drives may be a necessity or have fewer substitutes available compared to computer chips.

When evaluating the impact of price changes on sales revenue, understanding the price elasticity of demand is fundamental. Sales revenue is the total amount of money that is brought into the company from the sales of goods or services, calculated as the product's price times the quantity sold.

For products with an absolute price elasticity greater than 1 (elastic demand), an increase in price will typically result in a decrease in total revenue because the quantity demanded falls sharply. For products with an absolute price elasticity less than 1 (inelastic demand), raising prices should lead to an increase in total revenue since the quantity demanded does not drop significantly. In the ACME Corporation's scenario, we see that the computer chips, which have an elastic demand, will likely generate less revenue after the price increase. In contrast, disk drives are expected to generate more revenue following the price hike, due to their inelastic demand. However, without concrete figures for pre-adjustment prices and quantities, the exact impact on sales revenue remains uncertain.