Question:
If a firm wants to increase its revenue and it knows that the price elasticity of demand for its product is equal to 0.82, it should:
(1) decrease the price because demand is elastic.
(2) decrease the price because demand is unitary elastic.
(3) decrease the price because demand is inelastic.
(4) increase the price because demand is inelastic.
(5) increase the price because demand is elastic.
Correct Answer:
(4)
Answer Explanation:
A price elasticity of 0.82 means demand is relatively inelastic (PED < 1). To increase total revenue when demand is inelastic, a firm should increase its price, as the percentage drop in quantity will be smaller than the percentage increase in price.
Topic: Elasticity Year: 2023
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