CFA Practice Question

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CFA Practice Question

If demand is price inelastic, ______
A. an increase in price must raise profits.
B. an increase in price increases revenue.
C. a decrease in price reduces sales.
Explanation: If demand is price inelastic, the percentage change in quantity demanded is less than the percentage change in price; this means a price increase will increase revenue.

User Contributed Comments 5

User Comment
Hamad333_1 C is correct as well?! isn't it?
timkalt I agree with you, Hamad333_1. Or can anyone explain why C is wrong?
plablonde1 For C, a 1% decrease in price will mean a less than 1% increase in quantity demanded. You will have an increase in sales, just at a percentage lower than that of the price decrease.
guest I think, for price inelastic demand, although the price is decreased, the quantity demanded would not increase much; that means sales revenue will decrease but not the sales itself cause qty sold either remains same or tend to increase, so option B is most appropriate rather than C, although C may look correct in the first instance.
Horv Use common sense to eliminate C. If you are a consumer, and you see price go down, your response will not be "I will buy less because the price goes down". This only applies to outlying Giffin Goods.
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