Assume that several firms compete in the market for cellular phones and that the price elasticity for this industry is equal to 0.75. Based on this information, would you advise a firm in this industry to increase its price? If so, what is the percentage loss in total sales this firm should expect to experience?
A. Definitely no. Each 1 percent increase in price would result in 7.5 percent reduction in total sales, negatively affecting total revenues.
B. Definitely yes. Total revenues would increase as sales would decrease by only .75 percent for each 1 percent increase in price.
C. Not enough information is provided to make a sound decision. For the same reason, it is not possible to predict what the loss in sales for one firm would be.
D. Definitely no. Each 1 percent increase in price would result in 7.5 percent reduction in total sales, affecting total revenues positively.
Answer: C
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