Question

Suppose demand for a product is highly elastic. What will likely happen to a company's total revenue if it raises the price of that product?a. total revenue will riseb. total revenue will fallc. total revenue will remain the samed. total revenue will fluctuate

Answer 1

The correct answer is b. Total revenue will fall.

Step-by-step explanation:

The equation for the price elasticity of demand (PED) is ε =
`(dQ/Q)/(dP/P)`

where Q represents the quantity, P represents the price and d represents variation.

If the demand for a product is highly elastic, mathematically it means that the PED in absolute value is greater than 1.

|ε| >
`(dQ/Q)/(dP/P)` ⇒ |ε| > 1

Economically that means that the quantity demanded of that product will decrease more than proportionally to the increase in price of that same product. In other words, the company will experience that a increase in price of its product raises the revenue for each unit sold, but given that the PED is highly elastice an increase in price reduces the number of units actually sold to the extent the company's total revenue actually falls.