A firm finds that for the product that it produces, its (own) price elasticity of demand is 4. Currently, the firm is selling 2000 units per month at ₹5 per unit. If it wishes to increase its sales by 10%, it must
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GATE 2021 Question 1: Demand theory and elasticity
Answer and worked solution
Answer: (C)
Price elasticity of demand: (in magnitude).
To achieve a 10% increase in quantity demanded:
Since demand curves slope downward, increasing sales requires lowering the price. Therefore the firm must lower its price by 2.5% — option (C).
The trap: (B) lower its price by 2%
Students sometimes divide in the wrong direction or misremember the elasticity formula's arrangement, computing something or halving 4% incorrectly instead of dividing the target %change by the elasticity value.
Demand theory and elasticity has come up 161 times in 7 exams since 2004.
What this question tests
This question is on Price elasticity of demand, part of Demand theory and elasticity in Microeconomics.
How responsive quantity is to price, at a point, along a linear curve, and for constant-elasticity demand.
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