Under which of the following situations is a company NOT likely to fix a lower price for its product?
Answer & explanation
Correct answer: option 2
The correct answer is option 2- If the demand for a product is inelastic.
The price of a product is affected by the elasticity of demand of the product. The demand is said to be elastic if a relatively small change in price results in large change in the quantity demanded. Here numerically, the price elasticity is greater than one. Inelastic demand means that the quantity demanded does not change significantly when the price changes (people will buy roughly the same amount regardless of price). In this case, a company is less likely to lower the price because there is no significant increase in demand to justify it. If the demand is inelastic, the company can maintain a higher price without losing customers, so there is less incentive to lower the price.
OTHER OPTIONS
- If competitors introduce a substitute product, the company may lower its price to remain competitive.
- To attain market share leadership, companies often lower prices to attract more customers.
- When demand for the product is low, lowering the price can help stimulate sales.