How can a large retailer increase profits by reducing the markup on a fast-selling product?

• A. By lowering the price, the retailer can attract more buyers, increasing the quantity sold and total profit.
• B. Reducing the markup will only benefit the retailer if the product is not selling well.
• C. By reducing the markup, the retailer will decrease consumer surplus and lose customers.
• D. Lowering the markup will always reduce total revenue, regardless of demand.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the relationship between price, quantity sold, and profit. Profit is calculated as total revenue minus total cost, where total revenue is price multiplied by quantity sold.
2. Step 2: Recognize that reducing the markup means lowering the price closer to the retailer's cost, which can make the product more attractive to consumers and increase the quantity demanded.
3. Step 3: Analyze the price elasticity of demand for the fast-selling product. If demand is elastic, a lower price will lead to a proportionally larger increase in quantity sold, potentially increasing total revenue.
4. Step 4: Calculate the new total revenue by multiplying the reduced price by the increased quantity sold, and compare it to the original total revenue to see if it has increased.
5. Step 5: Determine the impact on profit by subtracting total costs from the new total revenue. If the increase in quantity sold compensates for the lower markup, the retailer's profit will increase.