Question

1. Suppose that a seller decreases price for his/her good by 5 percent. Discuss how total revenue changes when : a) Ed=0.3  b) Ed=1 c) Ed=1.5

Answer 1

When Ed=0.3, percentage change in quantity will slightly increase by $0.3\times 5\%=1.5\%$ , so total revenue will increase by $0.3\times 5\%=1.5\%$

when Ed=1, total revenue will increase by $1\times5=5\%$ when prices decrease by the said percentage.

when Ed=1.5, total revenue will increase by $1.5\times 5\%=7.5\%$ since an elasticity of demand above 1 shows customers react more to changes in price.