a. What is the condition on (the absolute value of) own-price elasticity that en

Question

a. What is the condition on (the absolute value of) own-price elasticity that ensures a firm's revenues, R, will increase as it increases in price?

b. Assuming that condition is satisfied, the Law of Demand holds, and C'(q) >= 0, what will happen to the firm's profits if it increases its price by a small amount?

i. Profits will necessarily increase.

ii. Profits will necessarily decrease.

iii. Profits will necessarily remain the same.

iv. It depends.

Note that R- pDp) Find the mathematical condition that implies revenue is increasing in price. Make sure you perform the Chain Rule correctly. Remember that D(p) and D(p) - 04 "Look for" own-price elasticity in your mathematical condition. C.

Explanation / Answer

If we want to be insured that form is experiencing a increase in revenue when it increases its price then we must have an inelastic demand. This is because when prices increased and demand is inelastic the percentage increase in price is more than the percentage fall in quantity demanded which means in net terms the percentage of change in revenue will be positive. And the only condition is that the absolute value of elasticity should be less than 1. Option B is correct

If we assume that the elasticity in absolute terms is less than 1 and prices are increased by small amount then revenue will surely increase. But profits will increase or not will depend upon the marginal cost of production

hence the correct choice is option IV it depends.

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