Question

When the magnitude of the price elasticity of demand is greater than the unit, then

Question 1 options:

	price and total revenue (total expenditure) are positively related.
	price and total revenue (total expenditure) are negatively related.
	price and total revenue (total expenditure) are not related.
	none of the above is true.

Answer 1

1) As when price elasticity of demand is greater than unit (=1) then it means that the rate of change in quantity supplied is greater than rate of change in price.

As, Total Revenue = Price * Quantity

So, If price increases then the equilibrium quantity will decrease at a higher rate hence it will lead to a fall in total revenue.

Now, If price decreases then the equilibrium quantity will increase at an even faster rate hence it will lead to a rise in total revenue.

Hence, If prices rise then Total Revenue falls and when prices falls then Total Revenue rises.

So, Price and total revenue are negatively related to each other.

• Hence, Option B. is correct