A sales director believes that the price elasticity of demand for Product X is greater than 1, and proposes to take advantage of this by reducing the selling price for Product X. What will happen to sales revenue and profit if the price is reduced?
【参考答案及解析】
If price elasticity of demand is greater than 1, a reduction in the selling price will result in an increase in the sales demand, so that total sales revenue increases. However, we do not know what will happen to total costs. Total costs will inevitably rise because more units of product will be made and sold. Without knowing more about the product's costs, we do not know by how much costs will rise. Total profit may well increase, but there is also a possibility that profits will fall because the increase in costs will exceed the increase in revenue following the price rise.
If price elasticity of demand is greater than 1, a reduction in the selling price will result in an increase in the sales demand, so that total sales revenue increases. However, we do not know what will happen to total costs. Total costs will inevitably rise because more units of product will be made and sold. Without knowing more about the product's costs, we do not know by how much costs will rise. Total profit may well increase, but there is also a possibility that profits will fall because the increase in costs will exceed the increase in revenue following the price rise.