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13. [G] We'll explore this in greater detail in a future homework, but the revenue a firm receives equals the price it receives per unit
13. [G] We'll explore this in greater detail in a future homework, but the revenue a firm receives equals the price it receives per unit of the good times the number of goods the firm sells. If the firm decreases the price customers have to pay by a certain percentage, and sells a higher percentage of units (for instance, a 10% price drop leads to a 15% increase in sales), it will increase its revenue. If the firm decreases the price customers have to pay by a certain percentage, and it sells a lower percentage of units (for instance, a 10% price drop leads to a 7% increase in sales), it will decrease its revenue. Knowing that, and recognizing what these statements mean concerning own-price elasticity, what will be true concerning a company trying to maximize its revenues and facing customers with a linear demand function (i.e. X1 = a-bpi) ? a. The firm will always increase its revenue by raising its price. b. The firm will always increase its revenue by lowering its price, until x1 = ab. c. As the firm lowers its price from p1 = a/b , the own-price elasticity will move from an clastic range to an inelastic range, implying the firm will not want to always lower its price to increase its revenue. d. As the firm lowers its price from pi = a/b , the own-price elasticity will move from an inelastic range to an elastic range, implying the firm will not want to always lower its price to increase its revenue
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