Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Lowering prices will always increase total revenue, regardless of the elasticity of demand.
B
In the elastic range of the demand curve, a decrease in price leads to a proportionally larger increase in quantity demanded.
C
Firms should consider the price elasticity of demand when setting prices to maximize revenue.
D
Operating in the inelastic range means that lowering prices will not affect total revenue significantly.
E
Price elasticity of demand is irrelevant for firms in monopolistic competition.
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. In monopolistic competition, firms sell products that are similar but not identical, which means consumers can switch to other brands if prices rise. If demand for a firm's product is elastic, lowering the price can lead to a significant increase in sales, potentially increasing total revenue. For example, if a coffee shop lowers the price of its specialty drink, more customers might choose to buy it instead of going to another shop, boosting overall sales. This understanding helps firms make better pricing decisions to maximize their profits while considering how sensitive their customers are to price changes.
Detailed Explanation
Other options are incorrect because This suggests that lowering prices will always help sales; This implies that a price drop always leads to a big increase in sales.
Key Concepts
Price Elasticity of Demand
Revenue Maximization
Monopolistic Competition
Topic
Price Elasticity and Revenue
Difficulty
medium level question
Cognitive Level
understand
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