Question

(a) If the demand equation is pq=k for a positive constant k, compute the elasticity of demand.

(b) What does your answer to part (a) mean in terms of the revenue function?
Choose all that apply.
1. All prices are critical points of the revenue function.
2. Revenue is increased by lowering the price.
3. Revenue is increased by raising the price.
4. Revenue does not change with changes in the price.

Answer 1

a.Elasticity of demand is p = k/q (an inverse relationship between the price and quantity)

b.My answer in part (a) means that an increase in the price of the item will lead to a decrease in its demand, hence the following applies

1.All prices are critical points of the revenue function.

2.Revenue is increased by lowering the price