Question

When the own price elasticity of good X is -3.5 then total revenue can be increased by:

A. decreasing the price

B. decreasing the quantity supplied

C. increasing price

D. neither increase price, decrease price nor decrease quantity supplied.

Answer 1

Here the Price elasticity of good X is -3.5 which is a elastic demand.

For elastic demand:

the revenue would increase if decrease the price as revenue gained from the more units sold would outweigh the revenue lost form the decrease in price.

if we increase price, our quantity effect outweighs the price effect, causing a decrease in revenue.

Thus to Increase revenue ,Price should be decreased.

option A