When demand is elastic, lowering the price will typically cause total revenue to

When demand is elastic, lowering the price will typically cause total revenue to

• A. decrease
• B. increase
• C. remain unchanged
• D. be unpredictable

Answer: (B)

Elastic demand means the quantity demanded responds more than proportionally to price changes—the percentage rise in quantity when price falls is larger than the percentage drop in price. So when you lower the price, buyers flood in, and total revenue goes up because you’re selling a lot more units at a lower price, and the bigger boost in quantity more than compensates for the lower price. A quick check helps: if price falls 10% and demand is elastic (let’s say elasticity is around 2), quantity rises about 20%. Revenue goes from P×Q to 0.9P × 1.2Q = 1.08 PQ, an increase. In contrast, with inelastic demand, the quantity wouldn’t rise enough to offset the lower price, so revenue would fall; with unit elastic, revenue stays unchanged.

Elastic demand means the quantity demanded responds more than proportionally to price changes—the percentage rise in quantity when price falls is larger than the percentage drop in price. So when you lower the price, buyers flood in, and total revenue goes up because you’re selling a lot more units at a lower price, and the bigger boost in quantity more than compensates for the lower price. A quick check helps: if price falls 10% and demand is elastic (let’s say elasticity is around 2), quantity rises about 20%. Revenue goes from P×Q to 0.9P × 1.2Q = 1.08 PQ, an increase. In contrast, with inelastic demand, the quantity wouldn’t rise enough to offset the lower price, so revenue would fall; with unit elastic, revenue stays unchanged.