CA Foundation Exam > CA Foundation Questions > If the demand is price inelastic:a)An increas...
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If the demand is price inelastic:
- a)An increase in price must raise profits
- b)An increase in price decreases revenue
- c)An increase in price increases revenue
- d)A decrease in price reduces sales
Correct answer is option 'C'. Can you explain this answer?
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Verified Answer
If the demand is price inelastic:a)An increase in price must raise pro...
This means that the percentage change in quantity demanded is less than the percentage change in price; this means a price increase will increase revenue.
Most Upvoted Answer
If the demand is price inelastic:a)An increase in price must raise pro...
Explanation:
Price Inelastic Demand:
Price inelastic demand refers to a situation where a change in price does not have a proportionate change in quantity demanded. In other words, the demand is not very responsive to changes in price.
Impact on Revenue:
When demand is price inelastic, an increase in price can actually lead to an increase in revenue. This is because while the quantity demanded may decrease due to the higher price, the increase in price per unit can offset this decrease in quantity. As a result, the total revenue (price x quantity) may increase.
Example:
For example, let's consider a luxury brand that sells high-end watches. The demand for these watches may be price inelastic as consumers who value the brand and quality may be willing to pay a higher price. If the brand increases the price of its watches, the quantity demanded may decrease slightly, but the increase in price per watch may lead to a higher total revenue.
Conclusion:
Therefore, when demand is price inelastic, an increase in price can lead to an increase in revenue. This is because the higher price per unit can compensate for the decrease in quantity demanded, resulting in a higher total revenue.
Price Inelastic Demand:
Price inelastic demand refers to a situation where a change in price does not have a proportionate change in quantity demanded. In other words, the demand is not very responsive to changes in price.
Impact on Revenue:
When demand is price inelastic, an increase in price can actually lead to an increase in revenue. This is because while the quantity demanded may decrease due to the higher price, the increase in price per unit can offset this decrease in quantity. As a result, the total revenue (price x quantity) may increase.
Example:
For example, let's consider a luxury brand that sells high-end watches. The demand for these watches may be price inelastic as consumers who value the brand and quality may be willing to pay a higher price. If the brand increases the price of its watches, the quantity demanded may decrease slightly, but the increase in price per watch may lead to a higher total revenue.
Conclusion:
Therefore, when demand is price inelastic, an increase in price can lead to an increase in revenue. This is because the higher price per unit can compensate for the decrease in quantity demanded, resulting in a higher total revenue.
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If the demand is price inelastic:a)An increase in price must raise profitsb)An increase in price decreases revenuec)An increase in price increases revenued)A decrease in price reduces salesCorrect answer is option 'C'. Can you explain this answer?
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