In an effort to increase profits, the Mid-Central Electric Co. is trying to decide whether to ask the Public Utilities Commission for permission to raise its rates. Some managers feel that a rate increase will not increase profits because higher rates will cause their customers to use less electricity, but other managers disagree.
Finally, the numbers are in: The director of marketing has determined that the breakeven sales level for a rate increase of 5 percent would be a unit sales loss of 8.6 percent. The market research department has determined that the price elasticity of Mid-Central's market is –1.12.
Use these numbers to determine whether or not it would increase Mid-Central’s profits to raise rates by 5 percent. Show your work.