Question

Pancake Inc. currently makes total revenue of $56,000. The elasticity of demand for their product is .9. If a change in market price causes total revenue to increase to $57,000 then that means.

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a

Price went up and the quantity demanded went down

b

Price went down and the quantity demanded went up

c

Price went down and the quantity demanded went down

d

Price went down and the quantity demanded did not change

e

There is no way of knowing from the information given.

Answer 1

As we can see, the elasticity of demand is 0.9 (less than one), therefore, we can say that both the price and the total revenue will move in the same direction, and according to the economic theory whenever the elasticity of demand is less than one (inelastic) then price and total revenue will move in the same direction. So, the right answer is option A, that is, price went up and the quantity demanded went down, as this reasoning is consistent with the prediction of the economic theory that states that price and total revenue must move in the same direction when the elasticity is inelastic.