Suppose that the price elasticity of demand is equal to –0.2. What is the relationship between price and total revenue (for a small change in price)? Group of answer choicesThey move in the opposite direction.When price changes, total revenue remains the same.They move in the same directions.They are unrelated.None of the other answers is correct.
Question
Suppose that the price elasticity of demand is equal to –0.2. What is the relationship between price and total revenue (for a small change in price)? Group of answer choicesThey move in the opposite direction.When price changes, total revenue remains the same.They move in the same directions.They are unrelated.None of the other answers is correct.
Solution
The price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good. In this case, the price elasticity of demand is -0.2. This is an inelastic demand situation, meaning that the quantity demanded is not very responsive to changes in price.
When the price elasticity of demand is inelastic (i.e., the absolute value is less than 1), then an increase in price leads to an increase in total revenue, and a decrease in price leads to a decrease in total revenue. This is because the percentage change in quantity demanded is less than the percentage change in price.
So, in this case, the price and total revenue move in the same direction. If the price goes up, total revenue also goes up. If the price goes down, total revenue also goes down. Therefore, the correct answer is "They move in the same directions."
Similar Questions
How does a price decrease affect total revenue when demand is elastic? Total revenue decreases. Total revenue increases. Total revenue remains the same. The effect on total revenue cannot be determined.
How would the following changes in price affect total revenue? That is, would total revenue increase, decrease, or remain unchanged? a. Price falls and demand is inelastic: b. Price rises and demand is elastic: c. Price rises and supply is elastic: d. Price rises and supply is inelastic: e. Price rises and demand is inelastic: f. Price falls and demand is elastic: g. Price falls and demand is of unit elasticity:
When demand has unit elasticity, revenue will decrease if price is lowered/raised/stays the same/changes in either direction
Which of the following could be the price elasticity of demand for a good for which an increase in price would decrease total revenue?Group of answer choices0.80.011.5
Following a price decrease, total revenue will:1 pointincrease if the demand is price inelastic.always increase.always decrease.increase if demand is price elastic.
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