Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Higher production costs lead to more elastic demand, prompting firms to reduce prices.
B
Increasing production costs typically result in a more inelastic demand, requiring firms to manage costs strictly to maintain profitability.
C
Costs have no impact on price elasticity, making cost management irrelevant.
D
Firms can increase production costs indefinitely without affecting demand elasticity.
Understanding the Answer
Let's break down why this is correct
Answer
In increasing cost industries, production costs tend to rise as more goods are produced, which affects how much a firm can charge for its products. When production costs go up, firms often have to raise prices to maintain their profit margins. This can make demand for their products more elastic, meaning customers might buy less if prices increase significantly. For example, if a bakery faces higher flour prices and raises its bread prices, some customers might choose to buy from a cheaper bakery instead. To manage costs, firms might look for ways to improve efficiency, such as using better technology or finding less expensive suppliers, to keep prices stable and maintain customer loyalty.
Detailed Explanation
When production costs go up, people are less sensitive to price changes. Other options are incorrect because This suggests that higher costs make demand more elastic, which is not true; This option says costs don't matter for price elasticity, which is incorrect.
Key Concepts
production costs
price elasticity
cost management
Topic
Increasing Cost Industries
Difficulty
hard level question
Cognitive Level
understand
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