Question

A firm sells​ 3,000 headphones at a price of​ $3 per unit. Even though this price is slightly higher than competing​ brands, the management is considering a further increase in price by 25 cents. The firm plans to focus advertising efforts on superior sound clarity.​ Rachel, the​ firm's marketing​ head, feels confident that a price increase by 25 cents will increase revenue. Industry analysts are of the opinion that even though the revenue is likely to​ increase, the firm must be careful of rivals who are actively competing for higher market share. Which of the following are both the management and the industry analysts likely to agree​ with?

A. Total revenue is maximized when the firm sells​ 3,000 headphones at​ $3 each.

B. Consumers of this particular brand of headphones are extremely​ price-sensitive.

C. The firm is operating on the inelastic portion of its demand curve.

D. The demand for headphones in general is more elastic than this particular brand of headphones.

E. There is no product differentiation in this market.

Answer 1

Answer:

(C)

Explanation:

Inelastic demand is when consumers or people buy the same amount of goods whether the price increases or decreases.

In this example, both the industry analyst and the firm would likely agree that the demand for headphones remains the same amount even when the price increases (with+25 cents) because they have an inelastic demand.

Inelastic demand is also best reflected in the demand for milk, even when prices increases, the demand remains the same because it is considered as a necessary good.