Question

You are running a small business and are thinking about ways to increase your profits. Assume you are facing an elastic demand. Would you raise or lower your prices?a. Raise because revenues would increaseb. Lower because revenues would increasec. Raise because revenues and costs would decreased. Lower because revenues would increase and costs would decreasee. I do not know because I cannot tell how much costs would change in relationship to revenues

Answer 1

Answer:

The correct answer is option b.

Explanation:

An elastic demand implies that a proportionate change in price will cause more than proportionate increase in the quantity demanded. So in order to increase profits, a small business should lower the price. This will lead to more than proportionate increase in the quantity demanded.  

The total revenue which is a product of quantity demanded and the price will increase. This will cause profits to increase.