Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The demand for the product is elastic, leading to a larger percentage increase in quantity demanded than the percentage decrease in price.
B
The company has reduced its production costs, allowing for a price drop without affecting revenue.
C
Consumers perceive the lower price as a decrease in quality, thus buying more of the product.
D
The product is a necessity, so price changes have little effect on demand regardless of elasticity.
Understanding the Answer
Let's break down why this is correct
Answer
When a company lowers the price of its product and sees a big increase in total revenue, it usually means that the demand for that product is elastic. This means that customers are very responsive to price changes; when the price goes down, many more people want to buy it. For example, if a toy store reduces the price of a popular toy from $20 to $15, more parents might decide to buy it for their children, leading to a large increase in sales. As a result, even though the price is lower, the increase in the number of toys sold can lead to higher total revenue. In this case, the lower price attracts more buyers, which is why total revenue goes up.
Detailed Explanation
When demand is elastic, a small price drop leads to a big increase in sales. Other options are incorrect because Some might think that lower production costs alone can raise revenue; It's a common belief that lower prices mean lower quality.
Key Concepts
Price Elasticity of Demand
Total Revenue
Monopolistic Competition
Topic
Price Elasticity and Revenue
Difficulty
easy level question
Cognitive Level
understand
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