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Explain why the following statement is true: “A firm with a demand curve that is inelastic at its current output level can always increase its profits by raising its price and selling less.” ( Hint : Refer back to “Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure.”)

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Microeconomics: Principles & Policy

14th Edition
William J. Baumol + 2 others
Publisher: Cengage Learning
ISBN: 9781337794992

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BuyFindarrow_forward

Microeconomics: Principles & Policy

14th Edition
William J. Baumol + 2 others
Publisher: Cengage Learning
ISBN: 9781337794992
Chapter 6, Problem 6DQ
Textbook Problem
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Explain why the following statement is true: “A firm with a demand curve that is inelastic at its current output level can always increase its profits by raising its price and selling less.” (Hint: Refer back to “Price

Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure.”)

To determine

The effect of a rise in price level on profit when the demand curve is inelastic.

Explanation of Solution

Elasticity of demand measures the degree of responsiveness of a change in the quantity demanded for a given change in the price level. It is calculated as follows:

   ed=ΔQΔP×PQ

When the percentage change in quantity demanded is relatively less than the percentage change in price, the commodity is inelastic or less elastic in nature.

Some necessary goods like salt and medicines are the goods whose demand curve is inelastic such as follows:

In the given diagram, the change in price is relatively more than the change in quantity that is, ΔP > ΔQ.

Suppose a firm producing 100 unit of a product x and sell it at $10 per unit price

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