Question

In which of the following situations will total revenue increase?
a. Price elasticity of demand is 1.2, and the price of the good decreases.
b. Price elasticity of demand is 0.5, and the price of the good increases.
c. Price elasticity of demand is 3.0, and the price of the good decreases.

Answer 1

Answer:

Total revenue will increase in all the situations.

Explanation:

A) PED = 1.2, the price of the good decreases, then the quantity demanded will increase in a larger proportion. For example, the price = $1 and the quantity demanded = 100 units, total revenue is $100. The price decreases 10% to $0.90, then the quantity demanded will increase 12% to 112 units, total revenue is $100.80

B) PED = 0.5, the price of the good increases, then the quantity demanded will decrease in a smaller proportion. For example, the price = $1 and the quantity demanded = 100 units, total revenue is $100. The price increases 10% to $1.10, then the quantity demanded will decrease 5% to 95 units, total revenue is $104.50

C) PED = 3, the price of the good decreases, then the quantity demanded will increase in a larger proportion. For example, the price = $1 and the quantity demanded = 100 units, total revenue is $100. The price decreases 10% to $0.90, then the quantity demanded will increase 30% to 130 units, total revenue is $117