A firm learns that the own price elasticity of a product it manufactures is 3.5. What would be the correct action for this firm to take if it wishes to raise its total revenue? A. Raise the price because demand for the product is inelastic. B. Lower the price because demand for the good is elastic. C. We need information on the firm's cost structure in order to answer this question. D. Raise the price because demand is elastic. E. Lower the price because demand is inelastic

Question

12-03-2021
Business

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A firm learns that the own price elasticity of a product it manufactures is 3.5. What would be the correct action for this firm to take if it wishes to raise its total revenue? A. Raise the price because demand for the product is inelastic. B. Lower the price because demand for the good is elastic. C. We need information on the firm's cost structure in order to answer this question. D. Raise the price because demand is elastic. E. Lower the price because demand is inelastic

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amcool amcool · Answer 1 · 2021-03-13T19:35:58+01:00

Answer:

The correct option is B. Lower the price because demand for the good is elastic.

Explanation:

Own price elasticity of a product can be described as the degree of the responsiveness of the quantity demanded of a product to its own price.

Own price elasticity of a product can be calculated as the percentage change in the quantity demanded of a product over the percentage change in the price of the product.

When the own price elasticity of a product is greater than 1, it implies that the demand for the good is elastic and that the percentage change in the quantity demanded is higher than the percentage change in its price. Therefore, the correct action for a firm to take if it wishes to raise its total revenue is to lower price.

When the own price elasticity of a product is less than 1, it implies that the demand for the good is inelastic and that the percentage change in the quantity demanded is lower than the percentage change in its price. Therefore, the correct action for a firm to take if it wishes to raise its total revenue is to increase price.

When the own price elasticity of a product is equal to 1, it implies that the demand for the good is unitary and that the percentage change in the quantity demanded is equal to the percentage change in its price. Therefore, the correct action for a firm to take if it wishes to raise its total revenue is to leave the price unchanged.

Since the own price elasticity of the product which the firm manufactures of 3.5 is greater than, it implies that based on the explanation above the correct option is B. Lower the price because demand for the good is elastic.