Question

Suppose researchers at the University of Wisconsin discover a new vitamin that increases the milk production of dairy cows. If the demand for milk is relatively inelastic, the discovery will
a. raise both price and total revenues.
b. lower both price and total revenues.
c. raise price and lower total revenues.
d. lower price and raise total revenues.

Answer 1

If the demand for milk is relatively inelastic, the discovery will lower both price and total revenues.

Option - b

Explanation:

Reducing prices to gain sales is a famous advertising tool. This type of situation arises mostly with every day products and services. If the quantity is increased, the demand will be inelastic this will lower both price and total revenue. Total revenue is reduced as price is reduced when demand is inelastic. When demand is inelastic, instead of reducing total revenue it could be hiked by raising price instead of reducing price.

Inelastic demand: In Economics, inelastic demand is even when the price of the product increases or decreases, the purchase rate of the product will be the same.