Question

As a manager of a firm, you have estimated that the demand for the product the firm sells is $ Q ^D = 1,800 – 5 P – 0.25 I, where P is the price of a unit of the firm's product and I is the average consumer income of the firm's customers. Currently, P = $80 and  I = $4,000.Based on this information, if you decide to increase the price by 1%, then

		a) Your total revenue from sales will increase by about $1,000
		b) The quantity demanded will decrease by about 2%.
		c) Your total revenue from sales will remain about the same.
		d )The quantity demanded will increase by about 0.75%

Answer 1

The correct answer is (C) Your total sales revenue will remain about the same.

This can be illustrated as :

Prior to price increase,

Price = $80

Quantity Demanded = 1,800 - (5 X 80) - (0.25 X 4000) = 400

So, Total Sales Revenue = $80 X 400 = $32,000

After price increase,

Price = $80.8

Quantity Demanded = 1800 - (5 X 80.8) - (0.25 X 4000) = 396

So, Total Sales Revenue = $80.8 X 396 = $31,996.8

Hence we obsserve, that after price increase, the total sales reveue has remained about the same.