Question

In: Economics

For each of the following, identify whether total revenue rises, falls, or remains constant:

For each of the following, identify whether total revenue rises, falls, or remains constant:

(a) Demand is inelastic and price falls.
(b) Demand is elastic and price rises
(c) Demand is unit elastic and price rises
(d) Demand is inelastic and price rises
(e) Demand is elastic and price falls.

Solutions

Expert Solution

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

a) Demand is inelastic and price falls.

When demand is inelastic i.e (Ep is < 1 in absolute terms) the quantity demanded is relatively unresponsive to changes in price.

If Price falls from P1 to P2, as you can see the quantity demanded will be the same. Due to price decrease and quantity demanded unchanged, the revenue will fall.

b) Demand is elastic and price rises

Elastic demand - when demand is elastic ( Ep>1 in absolute terms) , The % change quantity demanded decreases more than the % change in price.

Since less quantity will be demanded the revenue will fall.

When P2 is increased to P1, the demand falls from Q2 to Q1.

The change in demand is greater than the change in price hence revenue will fall

c) Unit elastic. Describes a supply or demand curve which is perfectly responsive to changes in price. That is, the quantity supplied or demanded changes according to the same percentage as the change in price.

Ep = 1

Hence the revenue will stay the same.

d) Demand is inelastic and price rises

When demand is inelastic i.e (Ep is < 1 in absolute terms) the quantity demanded is relatively unresponsive to changes in price.

If Price falls from P2 to P1, as you can see the quantity demanded will be the same. Due to price increase and quantity demanded unchanged, the revenue will rise.

Demand is elastic and price falls.

Elastic demand - when demand is elastic ( Ep>1 in absolute terms) ,

When price decreases the quantity demanded increases

Since morevquantity will be demanded the revenue will increase

When P1 is decreased to P2, the demand rises from Q1 to Q12

The change in demand is greater than the change in price hence revenue will increase

Rahul Sunny answered 1 year ago

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