Economics

When XYZ firm entered the market for good two years back, it kept the price of its product low to attract customers away from its leading competitor. The firm has now established itself and has a market share of 20 percent. The management of XYZ is is planning to increase price of A from the current $6 per unit to $7 per unit, Timothy Walters, the marketing head, however, feels this is not a good idea because it will reduce quantity demanded drastically from the current 1,200 units to 900 units. His colleague and the head of the sales department, Jake Mayers, feels that the quantity demanded would only decline by 250 units. According to Jake, the firm can afford to increase the price because even after the price increase they would still have significant market share. Which of the following, if true, would imply that the firm is operating in the inelastic portion of the demand curve?

a. the rival firm has reduced the price of its product by $1.
b. The $1 increase in price cause the leading competitor's market share to increase substantially.
c. The demand curve is vertical.
d. The demand curve recently shifted such that 20 additional units are demanded at each price level.
e. the quantity demanded declines by 10 percent in response to the $1 price increase

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