Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Higher elasticity increases marginal costs and decreases total revenue
B
Lower elasticity increases marginal costs and increases total revenue
C
Higher elasticity decreases marginal costs and decreases total revenue
D
Lower elasticity decreases marginal costs and increases total revenue
Understanding the Answer
Let's break down why this is correct
Answer
Price elasticity of demand measures how much the quantity demanded of a product changes when its price changes. If demand is elastic, a small increase in price will lead to a large drop in the quantity sold, which can decrease total revenue. For example, if a firm raises the price of a popular snack too much, people might buy much less, lowering the overall money the firm makes. On the other hand, if demand is inelastic, raising prices may not significantly reduce sales, allowing the firm to increase total revenue despite higher prices. Understanding this relationship helps firms decide how to price their products to maximize revenue while considering their marginal costs.
Detailed Explanation
When demand is less sensitive to price changes, firms can raise prices without losing many customers. Other options are incorrect because This option suggests that higher elasticity raises costs and lowers revenue; This option claims that higher elasticity lowers costs and revenue.
Key Concepts
price elasticity of demand
Topic
Marginal Costs and Total Revenue
Difficulty
easy level question
Cognitive Level
understand
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