Question

In which of the following situations will total revenue increase?

a. Price elasticity of demand is -1.2, and the price of the good increases.

b. Price elasticity of demand is -0.5, and the price of the good increases.

c. Price elasticity of demand is -3.0, and the price of the good increases.

d. We don't have enough information to determine total revenue.

e. None of the above are correct.

Answer 1

option B)

As TR = P*Q

So, %∆ in TR = %∆ in P + %∆ in Q

Now as, elasticity of demand = %∆ in Q/%∆ in P

So, %∆ in Q = e* %∆ in P

thus

%∆ in TR = %∆ in P + e* %∆ in P

= %∆ in P ( 1+e)

A) %∆ in TR = %∆ in P *( 1-1.2) < 0

TR would fall

B) %∆ in TR = %∆ in P*(1-.5) > 0

TR would rise

C) %∆ in TR = %∆ in P*(1-3) < 0