Answer to Question #224270 in Microeconomics for sultan

Question

Total revenue is the product of price and quantity. Whether total revenue rises or falls depends on increase or decrease in price with their respective elasticities. You are required to find what happened to total revenue on each situation given below with help of graph? i. Effects of price increase on a product with inelastic demand. ii. Effects of price increase on a product with elastic demand. iii. Effect of price cut on a product with elastic demand. iv. Effect of price cut on a product with inelastic demand.  

Answer 1

i. A product with inelastic demand will have no change in demand despite changes in price and thus an increase in price will lead increased total revenue since quantity will remain the same.

ii. A product with elastic demand will experience sharp decrease in demand due to increase in price and thus reducing total revenue significantly.

iii. A reduction in price for a product with elastic demand will make consumers to increase demand for the product and thus consume more hence increase total revenue significantly.

iv. A price cut on a product with an inelastic demand will have no effect on quantity demanded and thus the total revenue will reduce.