Question

Revenue at a major cellular telephone manufacturer was $2.3 billion for the nine months ending March 2, up 85 percent over revenues for the same period last year. Management attributes the increase in revenues to a 108 percent increase in shipments, despite a 21 percent drop in the average blended selling price of its line of phones. Given this information, is it surprising that the company’s revenue increased when it decreased the average selling price of its phones?

No. Own price elasticity is -5.14, which means demand is elastic and a decrease in price will raise revenues.
No. Own price elasticity is -0.19, which means demand is elastic and a decrease in price will raise revenues.
Yes. Own price elasticity is -5.14, which means demand is inelastic and a decrease in price will decrease revenues.
Yes. Own price elasticity is -0.19, which means demand is elastic and a decrease in price will decrease revenues.

Answer 1

When the demand for a product is elastic, the absolute value of elasticity becomes greater than 1 which means that 1% decline in price will increase the quantity demanded and sold by more than 1% and hence total revenue=price*quntity will rise as the increase in the quantity sold will outweigh the fall in price and hence the total revenue will increase. Hence here when elasticity is -5.14 i.e the absolute value of elasticity i.e 5.14 is higher than 1 and the demand is elastic. Hence the answer will be:

No. Own price elasticity is -5.14, which means demand is elastic and a decrease in price will raise revenues.