Question

2. Assume that the demand for cosmetic or plastic surgery is price inelastic. Are the following statements true or false? Explain.

e. If more plastic surgery is performed, expenditures on plastic surgery will decrease.

f. The marginal revenue of another operation is negative.

Answer 1

Elasticity of demand = % Change in quantity demanded / % Change in price

Demand is inelastic when Elasticity < 1.

So, % Change in quantity demanded < % Change in price

If Price increases (decreases) by 1%, quantity demanded decreases (increase) by less than 1%. The price effect is stronger than the quantity effect, and increase (decrease) in price will increase (decrease) total revenue.

e. If more plastic surgery is performed, expenditures on plastic surgery will decrease. This statement is true. This is because the quantity effect is weaker than price effect. So, as more surgery is performed, price falls by a more-than-proportionate amount. So, total revenue (expenditure) will fall.

f. The marginal revenue of another operation is negative. This statement is true. This is because total revenue will decline when price falls, demand is then inelastic.Marginal revenue is the amount of revenue the firm receives for each additional unit of output. It is the difference between total revenue price times quantity at the new level of output and total revenue at the previous output (one unit less).Marginal revenue can even become negative which means that the total revenue decreases from one output level to the next.