Why is it that a profit-maximizing businessman would always raise prices when facing an inelastic demand curve, but might or might not raise prices when facing an elastic demand curve?

Why is it that a profit-maximizing businessman would always raise prices when facing an inelastic demand curve, but might or might not raise prices when facing an elastic demand curve? Explain and justify your answers in detail by covering the inelastic and elastic demand curves. Make sure you define the meaning of the elastic and inelastic demands.

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Expert Solution

Demand is said to be inelastic when for a given percentage change in the price the quantity demanded changes by a lesser percentage so that price increase increases revenue as well as profit, assuming that costs are not changing

Demand is said to be elastic when for a given percentage change in the price the quantity demanded changes by a greater percentage. Price increase decreases revenue as well as profit in this case

Now for a business, it is not an optimum decision to increase the price when the market demand for its product is elastic in nature. Increasing the price will decrease the revenue in this case which will therefore reduce profit.

at the same time it is not an optimum decision to decrease the price when the market demand for the product is inelastic. This is because it will decrease the revenue and the profit

these arguments suggest that profit-maximizing businessman will always increase the price when the demand is inelastic and decrease the price when the demand is elastic.

Rahul Sunny answered 1 year ago

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