Sia
Question
Macroeconomics
Posted 10 months ago
If the price elasticity of demand for apples is 3 , then what will be the impact on total revenue if price increases?
Choose 1 answer:
(A) Total revenue will fall to zero
B) Total revenue triples
(C) Total revenue will increase
(D) Total revenue will decrease
(E) Total revenue will not change
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Answer from Sia
Posted 10 months ago
Solution
a
Understanding Price Elasticity of Demand (PED): PED measures how much the quantity demanded of a good responds to a change in the price of that good, calculated as the percentage change in quantity demanded divided by the percentage change in price
b
Given PED for Apples: The PED for apples is given as 3, which means that for a 1% increase in price, the quantity demanded decreases by 3%
c
Total Revenue and PED: Total revenue is the product of price and quantity sold. If demand is elastic (PED > 1), an increase in price will lead to a proportionally larger decrease in quantity demanded, thus decreasing total revenue
d
Applying PED to Total Revenue: Since the PED for apples is 3 (elastic demand), an increase in price will result in a decrease in total revenue because the percentage drop in quantity demanded will be greater than the percentage increase in price
Answer
Total revenue will decrease
Key Concept
Price Elasticity of Demand
Explanation
When the price of a good with elastic demand increases, total revenue decreases because the decrease in quantity demanded is proportionally larger than the price increase.
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