Suppose you notice that when a particular firm raised the price of its product, its total revenue also increased. What does this imply about the price elasticity of demand for this firm’s product and wha factors may be influencing the elasticity?
Ans: It signifies that absolute value of price elasticity of demand is less than 1 and demand is inelastic.
With inelastic demand, a X% increase in price decreases quantity demanded by less than X%, so total revenue increases.
Inelastic demand may be caused by following factors.
(1) Low number of substitutes makes demand inelastic.
(2) In short run, demand is more inelastic, compared to in long run.
(3) If the good in question comprises a small portion of consumer budget, and
(4) If the good in question is a necessity good.
You might also like to view...
Which of the following statements is true?
A) Firms are the demanders in the market for labor as well as the market for consumer goods. B) Firms are the suppliers in the market for labor as well as the market for consumer goods. C) Firms are the demanders in the market for labor, whereas they are the suppliers in the market for consumer goods. D) Firms are the suppliers in the market for labor, whereas they are the demanders in the market for consumer goods.
Which of the following examples definitely illustrates an appreciation of the U.S. dollar?
A) The dollar exchanges for 120 euros and then exchanges for 100 euros. B) The dollar exchanges for 100 yen and then exchanges for 125 euros. C) The dollar exchanges for 1 pound and then exchanges for 1.2 pounds. D) none of the above
A actor receives a $100,000 payment from a producer to prevent him from revealing a scandal. This is an example of ______.
a. leisure b. nonmarket transactions c. externalities d. the underground economy
The total demand for money curve will shift to the right as a result of:
A. an increase in nominal GDP. B. an increase in the interest rate. C. a decline in the interest rate. D. a decline in nominal GDP.