ACCA Applied Skills · Performance Management · Pricing decisions
A firm's product has demand elasticity of 0.6 (ignoring the sign) at its current price. Which action would be expected to increase total revenue?
When demand is inelastic, with elasticity below 1, a price increase causes a proportionately smaller fall in quantity demanded. Total revenue therefore rises, so increasing the price is the action expected to raise revenue.
- AReduce the price to stimulate demand
- BIncrease the priceCorrect
- CKeep the price unchanged and increase volume discounts
- DReduce the price and increase advertising only
Explanation
Demand is inelastic (elasticity below 1), so the percentage fall in quantity is smaller than the percentage rise in price. Raising price therefore increases total revenue. Cutting price would reduce revenue because volume would not rise proportionately.
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