1 Assume that the price elasticity of demand is 5 for a cert

1) Assume that the price elasticity of demand is .5 for a certain firm\'s product. If the firm decreases price, the firm\'s managers can expect total revenue to:

a) decrease.

b) increase.

c) remain constant.

d) increase or remain constant, depending upon the size of the price increase.

2) Which of the following statements is correct:

a) Maximizing total benefits is never equivalent to maximizing net benefits.

b) Maximizing total benefits is equivalent to maximizing net benefits if and only if there are no costs associated with achieving more benefits.

c) Profits cannot be maximized when marginal costs equal marginal benefits.

d) Net marginal benefits can never be equal to marginal benefits.

Solution

1)

a) decrease

i will put a example to jusitfy my answer

assume the demand for product = X

assume the price for product = Y

Revenue = X*Y

now assume price of product declines by 10%

so now we have new price for product = 0.90

price elasticity of demand = -.5

% change in demand / % change in price = -.5

% change in demand / -10%= -.5

% change in demand = 5%

so we can see with 10% decrease in price , there is less increase in quantity, that means by the rule of multiplication, we will get less revenues

New revenues = 1.05X*0.90Y = 0.9450XY which is less than XY.

2)

please put second question in the new post as we can answer only one question per POST as per Chegg policies.