Assume Pyrotex Inc. estimates the demand for its fireworks to be linear. If the current price charged by Pyrotex is such that the elasticity of demand is equal to 2.5, which of the following statements is true?
A) Pyrotex will surely increase its profits by decreasing the price of fireworks.
B) Pyrotex will surely increase its profits by increasing the price of fireworks.
C) Pyrotex cannot increase its profits by changing the price of fireworks.
D) Not enough information is provided to determine whether Pyrotex is currently maximizing its profits.

Question

Quizplus · Accepted Answer

When the elasticity of demand is greater than 1, decreasing the price will increase total revenue and profits.