Question

In which of the following situations will total revenue increase?

A. price elasticity of demand is 1.2 and the price of the good decreases
B. price elasticity of demand is 3.0 and the price of the good decreases
C. price elasticity of demand is 0.5 and the price of the good increases
D. all of the above

Answer 1

A. price elasticity of demand is 1.2 and the price of the good decreases

Step-by-step explanation:

Price elasticity of demand refers to the relationship change that occurs in the price for goods and the quantity demanded, the relationship change have an impact the business total revenue.

Revenue is the amount of money a business firm make from the sales of goods and services, it is the total number of units sold multiplied by the price per unit, and as the price or the quantity sold changes, the revenue also changes. Total revenue is the amount or price of an item multiplied by the number of units sold.

When demand is elastic at a given price level, the firm cut its price, this is because the percentage decrease in price will result in an even larger percentage increase in the quantity sold, therefore raising the total revenue.

Changes that are occurs are:

if the Price elasticity of demand is inelastic i.e less than 1 and a firm increases its price, the total revenue increases .

if the Price elasticity of demand is elastic i.e greater than 1 and a firm decreses its price, the total revenue increases .

if the Price elasticity of demand is elastic i.e greater than 1, and a firm increases its price, the total revenue decreases.

Answer 2

Option D

All of the above

Step-by-step explanation:

Price elasticity of demand is given as

Price elasticity of demand = % change in quantity demanded/ % change in price.

Change in quantity demanded will definitely lead to an increase in total revenue. Hence the formula can be revised to become:

Change in quantity demanded = Price elasticity of demand X % Change in price

Option A : If Price elasticity of demand is 1.2 and the price of the good decreases.

This will cause an increase in total revenue since we will be dividing by a reducing denominator

Option B: price elasticity of demand is 3.0 and the price of the good decreases:

This will cause an increase in total revenue since we will be dividing by a reducing denominator

Option C: price elasticity of demand is 0.5 and the price of the good increases:

This is a case of inelastic demand since price elasticity is < 1. In inelastic demand, the price of the good does not affect the change in demand significantly. This is the case of essential goods. Hence, the total revenue will still increase.