Final answer:
The correct option is 1) High.
Managers should set higher prices when demand is high to maximize profits but must find a balance to maintain consumer interest and manage competition.
Step-by-step explanation:
Generally speaking, managers should set higher prices when demand is high. This principle is based on the basic model of demand and supply. When consumers demand more goods than are available on the market, scarcity leads to increased prices, and this can sometimes improve profit margins as suppliers respond to the increased demand.
However, this relationship has natural limits. Excessively high prices can eventually reduce the quantity demanded as consumers seek alternatives or refuse to pay the inflated costs. It's essential for businesses to find an optimal price point where demand remains strong without alienating customers through excessive pricing. Competition also plays a crucial role in determining price levels, as it can lead to improved quality and lower prices, benefiting consumers.