Question

How would the following changes in price affect the total revenue? That is, would total revenue increase, decrease, or remain unchanged?
a. Price falls and demand is inelastic?
b. Price rises and demand is elastic?
c. Price rises and supply is elastic?
d. Price rises and supply is inelastic?
e. Prices rises and demand is inelastic?
f. Price falls and demand is elastic?
g. Price falls and demand is of unit elasticity?

Answer 1

a. Price falls and demand is inelastic: Total revenue will decrease. Even though the price has decreased, the demand remains inelastic, meaning that the quantity demanded will not change significantly. Therefore, the decrease in price will outweigh the increase in quantity, resulting in a decrease in total revenue.

b. Price rises and demand is elastic: Total revenue will increase. Demand is elastic, meaning that the quantity demanded will decrease significantly with a rise in price. However, because the price has increased, the decrease in quantity will be more than offset by the increase in the price, resulting in an increase in total revenue.

c. Price rises and supply is elastic: Total revenue will remain unchanged. Supply is elastic, meaning that the quantity supplied will increase significantly with a rise in price. However, the increase in quantity supplied will be offset by the decrease in price, resulting in no change in total revenue.

d. Price rises and supply is inelastic: Total revenue will increase. Supply is inelastic, meaning that the quantity supplied will not change significantly with a rise in price. Therefore, the increase in price will outweigh the decrease in quantity, resulting in an increase in total revenue.

e. Prices rises and demand is inelastic: Total revenue will increase. Demand is inelastic, meaning that the quantity demanded will not change significantly with a rise in price. Therefore, the increase in price will outweigh the decrease in quantity, resulting in an increase in total revenue.

f. Price falls and demand is elastic: Total revenue will decrease. Demand is elastic, meaning that the quantity demanded will increase significantly with a decrease in price. However, because the price has decreased, the increase in quantity will be more than offset by the decrease in the price, resulting in a decrease in total revenue.

g. Price falls and demand is of unit elasticity: Total revenue will remain unchanged. Demand is of unit elasticity, meaning that the quantity demanded will change proportionally with a change in price. Therefore, the decrease in price will be offset by the increase in quantity, resulting in no change in total revenue.

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