Which of the following determines whether a firm will earn higher revenues when it raises its price?
A)The cost of the firm's inputs.
B)Government regulation of the industry.
C)The price elasticity of demand.
D)None of the above, because companies always earn higher revenues when they increase price.

Question

Quizplus · Accepted Answer

The price elasticity of demand determines whether a firm will earn higher revenues when it raises its price. If the demand for the firm's product is elastic, meaning that a price increase will cause a large decrease in quantity demanded, then raising the price will actually result in lower revenues. On the other hand, if the demand is inelastic, meaning that a price increase will cause only a small decrease in quantity demanded, then the firm can earn higher revenues by raising its price. The cost of the firm's inputs and government regulation of the industry may affect the firm's profitability, but they do not directly determine whether a price increase will result in higher revenues. The statement "none of the above, because companies always earn higher revenues when they increase price" is incorrect, as the relationship between price and revenue depends on the elasticity of demand.

Which of the Following Determines Whether a Firm Will Earn