Question

Indicate whether the following activities will INCREASE or DECREASE if the demand for a product is inelastic. Write only 'Increase' or 'Decrease' next to the question number:

1.1 Sales
a. Increase
b. Decrease

1.2 Price of a product
a. Increase
b. Decrease

Answer 1

With inelastic demand, raising product prices generally increases total revenue. Therefore, sales quantity would decrease as prices rise, but revenue would increase due to the higher price.

Step-by-step explanation:

When the demand for a product is inelastic, an increase in the price of the product will typically lead to an increase in total revenue because consumers are less responsive to price changes. Therefore:

1. Sales: Decrease
2. Price of a product: Increase

Inelastic demand indicates that a product is a necessity or has few substitutes, so consumers will continue to purchase it even as prices rise. Since quantity demanded changes very little with a change in price, companies can afford to raise prices to increase their revenue.