If the Elasticity of Demand for Cigarettes Is 0

question 61

Multiple Choice

If the elasticity of demand for cigarettes is 0.4, a seller should

• A) Increase price to increase total revenue.
• B) Decrease price to increase total revenue.
• C) Reduce price to maximize profits.
• D) Increase price because the percentage change in quantity demanded will be greater than the price effect. If price elasticity of demand is 0.4, then demand is very inelastic. That means the seller can increase price and increase total revenue.

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Definitions:

Direct Labor-Hours

The total number of labor hours spent on producing a single unit of a product or service.

Fixed Manufacturing Overhead

Costs that do not vary with production volume, such as rent, salaries of permanent staff, and depreciation of factory equipment.

Predetermined Overhead Rate

A rate calculated before the accounting period begins, used to allocate manufacturing overhead costs to individual units of production based on a certain activity base.

Variable Manufacturing Overhead

Costs that vary with production volume, such as indirect materials and utilities, related specifically to the manufacturing process.