Question

Suppose that De Beers and the local water utility are both monopolists, in the markets for diamond jewelry and water, respectively.If both monopolies decide to raise prices by 15%, the monopoly that is most likely to see its total revenue decrease is ( A) De Beers or B) the local water utility) because it’s demand is A) unit elastic, B) less price elastic, or C) more price elastic.

Answer 1

(A) De Beers and (C) more price elastic

Step-by-step explanation:

De Beers deals in diamonds which are luxury goods while local water utility provides an essential good i.e water.

If both raise their prices, water being a necessity, it's demand would be inelastic i.e won't be affected, while diamond is a luxurious good with more price elastic demand.

Price elasticity of demand refers to degree of responsiveness of quantity demanded with change in price.

To conclude, De Beers is more likely to see it's total revenue fall in comparison to local water utility.