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A company has a policy of frequently cutting prices to increase sales. Product demand is significantly elastic. What impact would this have on the company's situation?
a. Quantity increases proportionally more than the price declines.
b. Quantity increases proportionally less than the price declines.
c. Price increases proportionally more than the quantity declines.
d. Price increases proportionally less than the quantity increases.
Answer:A
Choice "a" is correct. Quantity increases will be proportionally more than price declines if product demand is significantly elastic. Price elasticity of demand is measured as the ratio of % change in quantity divided by the % change in price. Values of the price elasticity of demand ratio greater than 1.0 are considered to be elastic. The demand elasticity presumed by the fact pattern equates with a price elasticity measure greater than 1.0 and, therefore, proportional changes in quantity are greater than changes in price.
Choice "b" is incorrect. Quantity increases will be proportionally more than price declines if product demand is significantly elastic. Price elasticity of demand is measured as the ratio of % change in quantity divided by the % change in price. The demand elasticity presumed by the fact pattern equates with price elasticity measures greater than 1.0 and, therefore, proportional changes in quantity greater than changes in price.
Choice "c" is incorrect. Price changes will be proportionately less than quantity changes in instances where price elasticity of demand is determined to be elastic.
Choice "d" is incorrect. Price changes will be proportionately less than quantity changes in instances where price elasticity of demand is determined to be elastic. Price increases, however, would typically result in quantity decreases, not increases.
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