Question

For the following​ scenario, decide whether you agree or disagree and explain your answer. If the elasticity of demand for cocaine is 0.20 and the Drug Enforcement Administration succeeds in reducing supply​ substantially, causing the street price of the drug to rise by​ 50%, buyers will spend less on cocaine. A. ​Disagree: When price increases and demand is​ inelastic, total revenue will rise. B. ​Agree: When price increases and demand is​ inelastic, total revenue will rise. C. ​Disagree: When price increases and demand is​ elastic, total revenue will rise. D. ​Agree: When price increases and demand is​ elastic, total revenue will fall.

Answer 1

A. ​Disagree: When price increases and demand is​ inelastic, total revenue will rise.

Step-by-step explanation:

A price elasticity of demand of 0.20 is a very low price elasticity, this means that cocaine users do not respond to price changes with equivalent changes in demand. In other words, if the price of cocaine increases, most of them will still buy the product, because demand will not fall as much as the price rises according to the price elasticity of demand.

For this reason, if the price of cocaine increases, the total amount spent on cocaine will increase.