Sia
Question
Microeconomics
Posted 7 months ago
According to the total revenue rule, what happens when you raise the price on a good with inelastic demand?
Choose 1 answer:
(A) Total revenue increases.
(B) Total revenue decreases.
(c) Total revenue falls to zero.
D Consumer spending on the good stays the same
(E) Total revenue doesn't change.
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Answer from Sia
Posted 7 months ago
Solution
a
Total Revenue Rule: The total revenue rule states that if the demand for a good is inelastic, an increase in price will lead to an increase in total revenue
b
Inelastic Demand: Inelastic demand means that the percentage change in quantity demanded is less than the percentage change in price. This implies that consumers are not very responsive to price changes
c
Application: When the price of a good with inelastic demand is raised, the decrease in quantity demanded is proportionally smaller than the increase in price, leading to an overall increase in total revenue
Answer
(A) Total revenue increases.
Key Concept
Total Revenue Rule
Explanation
When the demand for a good is inelastic, raising the price will result in an increase in total revenue because the decrease in quantity demanded is proportionally smaller than the increase in price.
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