Compute the price elasticity of demand if price increases from $10 to $12 and quantity demanded...

Compute the price elasticity of demand if price increases from $10 to $12 and quantity demanded falls from 600 to 400. Use the value obtained and a specific example to determine whether price must be increased or decreased to increase total revenue. Explain why. Note: Explain only how to increase total revenue, not decrease it.

Expert Solution

From the calculation in the A4 sheet the value of price elasticity of demand is greater than 1

So the demand is elastic in nature

When the demand is elastic then price and total revenue are are inversely related

It means if price increases then total revenue will decrease and vice versa

To increase the revenue, there must be decrease the price

An elastic demand is that type of demand in which even there is a small change in the price can causes heavy change in the quantity demanded

In this, the consumers are price sensitive

Hence when there is decrease in the price this will lead to higher quantity demanded by the people and ultimately leads to higher total revenue

Rahul Sunny answered 7 months ago

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