Question

How would the following changes in price affect total revenue? That is, would total revenue increase, decline, or remain unchanged?

1. Price falls and demand is inelastic.

2. Price rises and demand is elastic.

3. Price rises and supply is elastic.

4. Price rises and supply is inelastic.

5. Price rises and demand is inelastic.

6. Price falls and demand is elastic.

7. Price falls and demand is of unit elasticity

Answer 1

a. Price falls and demand is inelastic - Total revenue will fall

( It is so because if demand is inelastic then the quantity will not change much so price effect is more on total revenue as price fall total revenue also fall)

b. Price rises and demand is elastic - Total revenue will fall

It is so because if demand is elastic then the quantity will change much more so price effect is less and quantity effect is more on total revenue as price rises quantity reduce a lot and total revenue fall)

c. Price rises and supply is elastic - Total revenue will rise

It is so because if supply is elastic then the quantity supplied increase more than increase in price so total revenue also rise.

d. Price rises and supply is inelastic.- TR will rise

As price rises, supply is inelastic so quantity supplied will not change much so price effect is more, total revenue will rise.

e. Price rises and demand is inelastic. - TR will rise

As inelastic demand so more effect of price will be on TR. Hence TR will rise as price rise because quantity do not change much.

f. Price falls and demand is elastic. - TR will rise

As elastic demand so more quantity effect on total revenue and as price fall so quantity increases ( due to law of demand), and increase in quantity is more than decrease in price which causes TR to rise.

g. Price falls and demand is of unit elasticity. - TR remain same

It is so because both price and quantity decrease and increase ( respectively) will be in same proportion which nulify the effect of each other and TR remain same.