Knowing the price elasticity of demand is important in business because it allows a manager to determine whether:
A) a price increase will cause total revenue to rise or fall.
B) an increase in supply will cause total profit to rise or fall.
C) a price increase will cause the quantity demanded to rise or fall.
D) a price increase will cause the demand to rise or fall.

Question

Quizplus · Accepted Answer

Knowing the price elasticity of demand helps managers to determine how much of a change in quantity demanded will result from a change in price. If demand is elastic (responsive to changes in price), then a price increase will cause total revenue to fall, since the decrease in quantity demanded will more than offset the increase in price. On the other hand, if demand is inelastic (unresponsive to changes in price), then a price increase will cause total revenue to rise, since the increase in price will more than offset the decrease in quantity demanded. Therefore, understanding price elasticity of demand is crucial in making pricing decisions that maximize revenue.

Knowing the Price Elasticity of Demand Is Important in Business