Question

You are a senior sales and marketing analyst for a major retailing firm in Idaho. The marketing manager just stopped by your office with a very frustrated look on her face. She tells you that she is confused as to why, every time the company raises the sales price of its products, total revenue for the company declines.
Based on this information, which of the following explanations do you give her for why this situation occurs?

a. The demand for the company’s products is inelastic, so total revenue declines when prices are raised.
b. The demand for the company’s products is elastic, so total revenue declines when prices are raised.
c. The demand for the company’s products is elastic, so unit sales increase when prices are raised.
d. The demand for the company’s products is inelastic, so unit sales increase when pricesare raised.
e. The demand for the company’s products is elastic, so fixed costs increase when prices are raised

Answer 1

Answer:

b. The demand for the company’s products is elastic, so total revenue declines when prices are raised.

Explanation:

Price elasticity of demand measures the responsiveness of quantity demanded to changes in price of the good.

If the absolute value of price elasticity is greater than one, it means demand is elastic. Elastic demand means that quantity demanded is sensitive to price changes.

If prices are increased, the quantity demanded falls more than the percentage rise in price. As a result total revenue falls.

Demand is inelastic if a change in price has little or no effect on quantity demanded.

If demand is inelastic and prices are increased, the change in quantity demanded would be less than the change in price , as a result , total revenue would rise.

I hope my answer helps you