Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Demand for the product is elastic, leading to a proportionally larger decrease in quantity demanded.
B
The firm has increased production costs, making the lower price unprofitable.
C
Consumers perceive higher value at higher prices, thus buying less when prices drop.
D
The market is saturated, resulting in minimal changes in quantity demanded regardless of price.
Understanding the Answer
Let's break down why this is correct
Answer
When a firm lowers the price of its product, it expects to attract more customers and increase total revenue. However, if total revenue decreases instead, this could mean that the demand for the product is inelastic. This means that customers do not buy significantly more of the product even when the price drops. For example, if a company sells luxury watches, a price decrease might not lead to more sales because customers may perceive them as less valuable. In this case, the firm needs to understand its customers better and consider the nature of demand for its product to make more effective pricing decisions.
Detailed Explanation
When demand is elastic, a small price drop leads to a big increase in quantity sold. Other options are incorrect because This suggests that higher costs are the main issue; This idea assumes people only want to buy less when prices drop.
Key Concepts
Elasticity of Demand
Total Revenue
Marginal Revenue Product
Topic
Understanding Elasticity and Revenue
Difficulty
hard level question
Cognitive Level
understand
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