If a union argues that a price cut will boost revenues of the firm and management argues that the opposite is true,then the price elasticity of demand is:
A) unit-elastic from the union's perspective and unit-inelastic from management's perspective.
B) perfectly inelastic from the union's perspective and perfectly elastic from management's perspective.
C) elastic from the union's perspective;inelastic from management's perspective.
D) inelastic from the union's perspective;elastic from management's perspective.

Question

Quizplus · Accepted Answer

If the union argues that a price cut will boost revenues, then they must believe that the demand for the product is relatively elastic. This means that consumers are sensitive to changes in price, so a small decrease in price will lead to a large increase in quantity demanded, thus increasing revenue. On the other hand, if management argues that a price cut will decrease revenue, then they must believe that the demand for the product is relatively inelastic. This means that consumers are not very sensitive to changes in price, so a small decrease in price will lead to only a small increase in quantity demanded, thus decreasing revenue. Therefore, the price elasticity of demand is elastic from the union's perspective and inelastic from management's perspective. Choice C is the only option that reflects this.

If a Union Argues That a Price Cut Will Boost