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 increase its revenues by decreasing the price of fireworks.
B)Pyrotex will increase its revenues by increasing the price of fireworks.
C)Pyrotex cannot increase its revenues by changing the price of fireworks.
D)Not enough information is provided to determine whether or not Pyrotex is currently maximizing its revenues.

Question

Quizplus · Accepted Answer

Since the elasticity of demand is greater than 1 (elastic demand), decreasing the price will lead to a proportionally larger increase in quantity demanded, thus increasing total revenue.