Question

Demand for oil is very inelastic. If an oil company were to increase its productivity in...

Demand for oil is very inelastic. If an oil company were to increase its productivity in extracting oil, then its revenues would...

a. Stay the same.

b. All of the other options are possible.

c. Rise.

d. Fall.

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Answer #1

Answer to the question:

Option d: Fall.

Explanation: When the oil company increases its productivity, its cost of production declines and the supply increases. This will cause the price to decline and the quantity demanded to increase. Since, it is a industry where the demand is inelastic, So, the percentage change in the price is less than the percetage change in the quantity demanded. Thus, when the demand increases it will lead a to grater decline in the price and thus the total revenue will decline.

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