Question:
Assume that the demand for a certain firm’s product is perfectly inelastic. What will be the effect on the firm’s revenue if the firm increases its price by 6%?
(1) Revenue will be unchanged.
(2) Revenue will increase by 6%.
(3) Revenue will decrease by 6%.
(4) Revenue will fall to zero.
(5) Revenue will increase by less than 6%.
Correct Answer:
(2)
Answer Explanation:
Perfectly inelastic demand means consumers buy the exact same quantity regardless of the price (Price Elasticity = 0). Since Total Revenue = Price x Quantity, and Quantity is constant, a 6% increase in Price directly causes a 6% increase in Total Revenue.
Topic: Elasticity Year: 2018
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