If demand is elastic, a reduction in price causes total revenue to rise because: A)the percentage…
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Question “If demand is elastic, a reduction in price causes total revenue to rise because: A)the percentage…”
If demand is elastic, a reduction in price causes total revenue
to rise because:
A)the percentage decrease in price exceeds the percentage
increase in quantity demanded.
B) demand is unresponsive to changes in price.
C)the percentage increase in quantity demanded exceeds the
percentage decrease in price.
D)the percentage changes in quantity demanded and price are the
same.
Answer
Answer: C. The percentage of the increase in demand exceeds that of the price.
If the demand is elastic, a decrease in price will cause total revenue to rise as the percentage of quantity demanded exceeds that of the price.
The price of a good determines the quantity that is required. Q = f(P …..(1)
The price elasticity of demand(
d) for a good is the responsiveness of the change in quantity demanded of a good for the change in its price.
d = – (dQ / Q) / (dP / P)
d = -(dQ / dP) * (P/Q)
The sum of the price (P) and the quantity sold (Q) of the goods is called the total revenue.
R = Q * P
Or, R = f(P), from equation (1)
Now, dR/dP = P* f (p), + f(P).
Or, dR/dP = P* f ‘(p), + Q, as Q = (P)
Or, dR / dP = [QP/Q * f‘(p) + 1] ….(2)
Now, take equation (1) and calculate f(P), Q
f (P), = dQ/dP
We can also write equation(2) as:
dR = [QP/Q* dQ/dP+ 1]
d = – (dQ / dP) * (P/Q)
d + 1)
d)
If the price elasticity is elastic for a good, the percentage change of quantity required is greater than the price change.