Peacock is debating decreasing the price of its rooms to $325 per night. Under the initial demand conditions, you can see that this would cause its total revenue to _____ . Decreasing the price will always have this effect on revenue when Peacock is operating on the _ portion of its demand curve.

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andrethompson4508 andrethompson4508

30-03-2020
Business

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Peacock is debating decreasing the price of its rooms to $325 per night. Under the initial demand conditions, you can see that this would cause its total revenue to _____ . Decreasing the price will always have this effect on revenue when Peacock is operating on the _ portion of its demand curve.

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enyo enyo · Answer 1 · 2020-04-03T15:00:47+02:00

Answer:

Decrease in price would have increasing effect on total revenue, when demand is elastic (upper portion of demand curve)

Decrease in price would have decreasing impact on total revenue, when demand is inelastic (lower portion of demand curve)

Explanation:

Elasticity is the responsive change in demand, due to change in price. P.Ed = % change in demand / % change in price = %ΔQ / %ΔP. Geometrically P.ed [on demand curve point] : (Lower portion on curve from the point) / (Upper portion on curve from the point)

Total Revenue is the total value of sale = Price x Quantity = P x Q

Elastic Demand : Demand responds more to price change. P.Ed > 1, %ΔQ > %ΔP. So, Price & total revenue are inversely related - price rise implies TR fall & price fall implies TR rise. Demand is elastic in upper portion of demand curve, as lower portion > upper portion at these points.

Inelastic Demand : Demand responds less to price change. P.Ed < 1, %ΔQ < %ΔP. So, Price & total revenue are directly related - price rise implies TR rise & price fall implies TR fall. Demand is inelastic in the lower portion of demand curve, as lower portion < upper portion at these points.