Answer to Question #220831 in Microeconomics for Rahul jain

Question

Q7:- A firm increased the price of its product by 5.0 per cent and observed that its revenue increased by 3.0 per cent. Enthused by this fact, it again raised price by another 5.0 per cent. This time revenue fell by 8.0 per cent.How can one use the concept of elasticity to explain this be explained?

Answer 1

The price elasticity of demand for the firm's product shifts from inelastic to elastic in this scenario. A 5% rise in price leads to a 3% increase in revenue, indicating that the product is price inelastic throughout a price range. Price and revenue are normally positively linked when a product is a price inelastic. If the price goes up, the overall revenue goes up, and if the price goes down, the total revenue goes down. As a result, when the price was raised by 5%, overall revenue climbed by 3% since demand is inelastic. On the other hand, when the price was raised another 5%, demand became elastic as the product was pushed into a higher price range. Consumers are typically sensitive to price changes at higher prices, and demand becomes elastic as a result. Price and total revenue are inversely linked when a product is a demand elastic. That is, raising the price lowers overall revenue, whereas lowering the price raises total revenue.