Question

The manager of a firm believes that she could increase sales by 1 unit per month if she lowered the price by 50 cents, but the revenue gained from the additional sale would be less than the revenues lost from the lower price. This indicates that the manager perceives demand to be...

Answer 1

Answer:

Inelastic

Explanation:

Price elasticity of demand refers to degree of responsiveness of change in demand with due to the change in price.

When a small change in price is accompanied by a higher change in the quantity demanded, this indicates the demand being elastic.

On the other hand, when a substantial change in price results in less than proportionate change in the quantity demanded, it indicates that demand is inelastic.

Price elasticity of demand is mathematically represented as:

$E_{p} = \frac{dQ}{dP} *\ \frac{p}{q}$

wherein, $E_{p}$ = Price elasticity of demand

              dQ= change in quantity demanded i.e $Q_{2} \ -\ Q_{1}$

              dP = Change in price i.e $P_{2} \ -\ P_{1}$

              p = original price

              q = original quantity

In the given case, the manager thinks, when price is reduced by 50 cents, the sales quantity will rise by 1 unit, but the total revenue, which is the product of price and quantity demanded, will fall. This indicates, the demand was perceived as inelastic.

This represents the case wherein, with fall in prices, the total revenue also falls i.e inelastic demand.