Question

Your boss asks you to increase the prices of gasoline. He is confident that the total revenue will go up because of higher prices; he does not care about some customers not buying. That means, he believes that the _____

a. Demand is inelastic

b. Supply is inelastic

c. Supply is inelastic

d. Demand is elastic

Answer 1

When the increase in price of gasoline causes to increase in total revenue then demand must be inelastic

To understand it consider to points , combination of price and quantity for good x (say)

P Q PQ = TR

10 100 1000

50 50 2500

Ed = (Q2 - Q1/Q2 + Q1)(P2 + P1/P2 - P1) This is simplified form of midpoint method of computing Ed

= (50 - 100/50 + 100)(50 + 10/50 - 10)

= (- 50/150)(60/40)

= - (1/3)(3/2)

= - 1/2

= - 0.5

In our example we found that when price goes up from 10 to 50 , TR goes up from 1000 to 2500 and Ed = 0.5 < 1 which means demand is inelastic.

Thus, (a) is correct option.