Scenario 5.1
The demand for noodles is given by the following equation: Q = 20 - 4P + 0.2I - 2P x . Assume that P = $8, I = 200, and P x = $10.
-If price elasticity of supply is large and demand is price-inelastic, then the firm can earn positive profits by increasing the price.

Question

Quizplus · Accepted Answer

If price elasticity of supply is large, then the supply of the noodles can be easily increased in response to a price increase, allowing the firm to continue to sell a large quantity of noodles even as they increase the price. Meanwhile, if demand is price-inelastic, then a price increase will not lead to a significant decrease in the quantity demanded. Therefore, the firm can earn positive profits by increasing the price, as the increase in revenue from each unit sold will outweigh any decrease in the number of units sold.

Scenario 5.1 The Demand for Noodles Is Given by the Following Equation