Answer:
B
Explanation:
Price elasticity of demand measures the responsiveness of quantity demanded to changes in price of the good.
Price elasticity of demand = percentage change in quantity demanded / percentage change in price
If the absolute value of price elasticity is greater than one, it means demand is elastic. Elastic demand means that quantity demanded is sensitive to price changes.
Demand is inelastic if a small change in price has little or no effect on quantity demanded. The absolute value of elasticity would be less than one
Demand is unit elastic if a small change in price has an equal and proportionate effect on quantity demanded
Price elasticity = 30% / 20% = 1.5
Demand is elastic. If price is reduced, the quantity demanded would increase and total revenue would increase
As a result of the quantity demanded increasing at a higher rate than the fall in price, the result would be B. total revenue will increase.
When a price decrease is such that the percentage it decreased by is less than the percentage the quantity demanded increased by, the total revenue will increase.
For instance:
Assume a company is selling 10 units of a product for $1. Total revenue:
= 10 x 1
= $10
If price decreases by 20% and quantity demanded increases by 30%, the company would be selling 13 units at $0.80:
= 13 x 0.80
= $10.40
Total revenue has increased.
In conclusion, this scenario would lead to an increase in total revenue.
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