The correct answer is: A. Raises the price because the demand for the good is elastic.
The own-price elasticity of demand is a measure of how responsive consumers are to changes in the price of a good. A good with an elastic demand is one where consumers are very responsive to changes in price, meaning that a small change in price will lead to a large change in quantity demanded. A good with an inelastic demand is one where consumers are not very responsive to changes in price, meaning that a large change in price will lead to a small change in quantity demanded.
In this case, the firm learns that the own-price elasticity of demand for its product is 3.5. This means that the demand for its product is elastic, and that consumers are very responsive to changes in price. Therefore, the firm can raise its price and still expect to increase its total revenue.
Here is a more detailed explanation of each option:
- Option A: Raises the price because the demand for the good is elastic. This is the correct answer, as explained above.
- Option B: Lowers the price because the demand for the good is elastic. This is incorrect, as a firm with an elastic demand should raise its price, not lower it.
- Option C: We need information on the firm’s cost structure to answer. This is incorrect, as the firm’s cost structure is not relevant to the decision of whether to raise or lower the price.
- Option D: Raise the price because demand is elastic. This is incorrect, as the firm should raise its price, not lower it.