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Price Elasticity of Demand and Increasing Profits

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A company currently sells 60,000 units a month at $10 per unit. The marginal cost per unit is $6. The company is considering raising the price by 10% to $11. If the price elasticity of demand is _______________ in that price range, then profits would increase if the company decided to raise the price by 10%.

a) equal to -3
b) greater than +1
c) less than -3.5
d) greater than -2.

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Solution Summary

The solution determines if the price elasticity of demand is in a specific price range, then profits would increase if the company decided to raise the price by 10%.

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We already determined that the company would not want to raise prices if the PED was equal to or less than -1. For example, at -2 we would have a 2% decline in demand for every 1% increase in price. So the 10% increase in price means a 20% decrease in ...

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