Which of the following explains why a firm would be interested in the knowing the price elasticity of demand for a good it sells?
A) The price elasticity of demand can be used to determine the impact of changes in income on quantity sold.
B) Knowing the price elasticity of demand allows the firm to determine how the cost of producing additional units of the good will change.
C) Knowing the price elasticity of demand allows the firm to calculate how changes in the price of the good will affect the firm's total profit.
D) The price elasticity of demand allows the firm to calculate how changes in the price of the good will affect the firm's total revenue.

Question

Quizplus · Accepted Answer

Price elasticity of demand measures the responsiveness of quantity demanded to a change in the price of the good. By knowing the price elasticity of demand, the firm can estimate how changes in the price of the good will impact the firm's total revenue. If demand is elastic (price-sensitive), increasing the price will lead to a decrease in revenue, whereas if demand is inelastic (not price-sensitive), increasing the price will lead to an increase in revenue. Therefore, understanding the price elasticity of demand can help the firm make pricing decisions that maximize profits.

Which of the Following Explains Why a Firm Would Be