Question

A price change causes the quantity demanded of a good to increase by 2 percent, while the total revenue of that good decreased by 8 percent. Over this price range is the demand for this good elastic, inelastic or unitary elastic? Could anyone explain, please?

Answer 1

Formula:

% change in (A*B) = % change in A + % change in B

Total revenue(TR) = P*Q , where P = Price and Q = Quantity

Hence using above formula we get:

% change in (TR) = % change in (P*Q) = % change in P + % change in Q

As it is given that the quantity demanded of a good to increase by 2 percent, while the total revenue of that good decreased by 8 percent.

Hence, % change in Q = 2% , % change in TR = -8%

Hence, % change in P = -8% - 2% = -10%

Elasticity of demand = (% change in Quantity) / (% change in Price) = (-) 2/10 = (-) 0.2

Hence absolute value of elasticity of demand is lesser than 1.

Hence,  Over this price range is the demand for this good is inelastic