Question

Which of the following is most likely to occur when price is inelastic?

A) A price decrease increases unit margin.

B) A price decrease increases gross profit.

C) A price decrease hurts sales.

D) A price decrease reduces unit volume.

E) A price increase reduces gross profit.

Answer 1

In cases where price is inelastic, increasing prices typically leads to higher total revenue because the reduction in units sold is proportionally less than the increase in price. Therefore, the most likely occurrence is not a reduction in gross profit from a price increase.

Step-by-step explanation:

When price is inelastic, the most likely occurrence is that a price increase will not significantly decrease the quantity sold, thus increasing total revenue. This scenario is most aligned with option E) A price increase reduces gross profit, which is the opposite of what typically happens when a good’s price is inelastic. In an inelastic situation, businesses can raise prices without a significant loss in sales volume, resulting in higher total revenue. For instance, if a company is considering altering the price of a product with an elasticity of 0.6, it would be advised to increase the price because the decrease in units sold would be smaller proportionally than the increase in price, leading to an overall increase in total revenue. On the other hand, if the demand were elastic, as in the hypothetical case where elasticity is 1.4, a decrease in price would lead to an increase in the quantity sold, compensating for the lower price and possibly increasing total revenue.