Economics · Price Elasticity of Demand
A manufacturer of specialized cooling equipment increases product prices due to rising raw material costs. Despite this, sales volume remains stable because clients face high switching costs, lack suitable alternative suppliers, and require the equipment for critical operations. Which of the following best explains why the firm can pass cost increases to customers without a significant drop in demand?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The market is in a state of perfectly competitive equilibrium where price equals marginal cost.
- 2The supply is perfectly inelastic because the company is unable to increase production regardless of price.
- 3The demand is relatively inelastic because of high switching costs, lack of substitutes, and the essential nature of the good.✓
- 4The demand is perfectly elastic because the clients are large organizations with significant bargaining power.
Correct answer
The demand is relatively inelastic because of high switching costs, lack of substitutes, and the essential nature of the good.
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