Which statement best describes the relationship between price, demand, and profit?

Which statement best describes the relationship between price, demand, and profit?

• A. Increasing price always increases profit.
• B. Pricing affects demand; higher price reduces volume but increases margin; the optimal price maximizes contribution margin.
• C. Round-number pricing has no effect on sales.
• D. Price changes do not affect demand.

Answer: (B)

Pricing changes drive demand because customers respond to the value they perceive. When you raise price, you usually sell fewer units; when you lower price, you often sell more. The money you actually keep from each unit is the margin, which is price minus variable cost per unit. Profit isn’t just about margin per unit—it also depends on how many units you sell, since total profit equals margin per unit times quantity minus fixed costs. If fixed costs stay the same, maximizing profit lines up with maximizing the contribution margin across the expected sales volume. So the best price is the one that balances higher per-unit margin with enough sales volume to maximize overall contribution. A simple example helps: if the variable cost per unit is fixed, a higher price raises margin per unit but may shrink quantity sold; the overall contribution (and thus profit) depends on the combination, not just the highest price. That’s why the statement emphasizes that pricing affects demand, that higher price reduces volume but increases margin, and that the optimal price is the one that maximizes contribution margin. The other ideas—price changes never affecting demand, or simply that higher price always means higher profit, or that round-number pricing has no effect—don’t fit the real relationship. Demand responds to price, and profit depends on the trade-off between margin and volume.

Pricing changes drive demand because customers respond to the value they perceive. When you raise price, you usually sell fewer units; when you lower price, you often sell more. The money you actually keep from each unit is the margin, which is price minus variable cost per unit. Profit isn’t just about margin per unit—it also depends on how many units you sell, since total profit equals margin per unit times quantity minus fixed costs. If fixed costs stay the same, maximizing profit lines up with maximizing the contribution margin across the expected sales volume.

So the best price is the one that balances higher per-unit margin with enough sales volume to maximize overall contribution. A simple example helps: if the variable cost per unit is fixed, a higher price raises margin per unit but may shrink quantity sold; the overall contribution (and thus profit) depends on the combination, not just the highest price. That’s why the statement emphasizes that pricing affects demand, that higher price reduces volume but increases margin, and that the optimal price is the one that maximizes contribution margin.

The other ideas—price changes never affecting demand, or simply that higher price always means higher profit, or that round-number pricing has no effect—don’t fit the real relationship. Demand responds to price, and profit depends on the trade-off between margin and volume.