Sia
Question
Microeconomics
Posted 6 months ago
Which of the following would be an indication that a firm has an elastic demand for its goods?
Choose 1 answer:
(A) Total revenue doesn't change when it raises its price
(B) Consumer spending increases when it raises its price
(c) Consumer spending decreases when it lowers its price
D Total revenue doesn't change when it lowers its price
(E) Total revenue increases when it lowers its price
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Answer from Sia
Posted 6 months ago
Solution
a
Elastic Demand: When demand is elastic, a decrease in price leads to an increase in total revenue, and an increase in price leads to a decrease in total revenue
b
Total Revenue Test: If total revenue increases when the price is lowered, it indicates that the demand is elastic
Answer
(E) Total revenue increases when it lowers its price
Key Concept
Elastic Demand
Explanation
When a firm has elastic demand for its goods, lowering the price will result in a proportionally larger increase in quantity demanded, leading to an increase in total revenue. This is because the percentage change in quantity demanded is greater than the percentage change in price.
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