Answer to Question #310349 in Macroeconomics for Hirpo Ayano

Question

Suppose that the seller decrease Price for his/her good by5 percent.Discuss how total revenue changes when 1) ed=0.3 2) end =1 3). ed =1.5

Answer 1

Solution

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.