Question

For the following question: At a price of $18, 100 are demanded At a price of $12, 300 are demanded At a price of $6, 500 are demanded.

25. _____ According to the above information, if the price decreased from $18 to $6, what would happen to total revenue: A. total revenue would increase by $1,200 and demand would be elastic B. total revenue would increase by $800 and demand would be elastic C. total revenue would decrease by $1,200 and demand would be inelastic D. total revenue would decrease by $800 and demand would be inelastic

Answer 1

Total revenue = price*quantity

At price $18, total revenue = 18*100 = $1800

At price $6, total revenue = 6*500 = $3000

When the price will be decreased from $18 to $6, the total revenue will increase by $1200 (3000-1800).

Price elasticity of demand = percentage change in Quantity demanded/percentage change in price

= {(500-100)*100/100}/{(6-18)*100/18}

= 400/(-67)

= - 5.9

Elastic demand as ep > 1.

Thus the total revenue will increase by $1200 and the demand will be elastic.

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