In 1916, the Ford Motor Company produced 500,000 Model T Fords at a price of $440. The company made a profit of $60,000,000 that year. Henry Ford told a newspaper reporter that he intended to reduce the price of the Model T to $360, and he expected to be able to sell 800,000 cars at that price. Ford said, "Less profit on each car, but more cars, more employment of labor, and in the end we get all the total profit we ought to make." Did Ford expect the total revenue he received from selling Model Ts to rise or fall following the price cut?

(A) Rise because he assumed demand was elastic.

(B) Fall because he assumed demand was elastic.

A) Rise because he assumed demand was elastic

Explanation:

Elasticity of demand represents in economics explains the sensitivity of the demand of product based on the changes in other variables including consumer income and prices.

If the demanded quantity of a product drastically changes drastically with an increase or decrease in price then the demand for the product is said to be elastic. The demand is, howeve, deemed inelastic if there is only a little change in quantity demanded with the increase or decrease in price.

For Ford Motor Company, The decrease in price = $440-$360 = $80 and The expected increase in Quantity demanded = 800,000-500,000=300,000

The change in quantity is about 60% as a result of a $80 (18%) decrease in price.

Due to the new Quantity, the expected new total revenue=

800,000 * $360 = $288,000,000

as Compared to

The Old Total Revenue = 500,000*$440 = $220,000,000

The Elasticity of demand, therefore means that Total Revenue will rise with the price cut.