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Chapter 18: Problem 1

If demand is inelastic and price is raised, total revenuc will \((1.03)\) a) rise b) fall c) stay the same d) possibly rise or possibly fall

Short Answer

Expert verified
In the case of inelastic demand (PED < 1), when the price is raised, total revenue will increase. Therefore, the correct answer is: a) rise

Step by step solution

01

Understand price elasticity of demand

Price elasticity of demand (PED) measures the responsiveness of the quantity demanded of a good to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. Mathematically, PED can be expressed as follows: \[PED = \frac{\%\mathrm{change\,in\,quantity\,demanded}}{\%\mathrm{change\,in\,price}}\]
02

Determine the nature of inelastic demand

Inelastic demand refers to a situation where the percentage change in quantity demanded is less than the percentage change in price, resulting in a PED value of less than 1. Mathematically, for inelastic demand: \[PED < 1\]
03

Recall the relationship between PED, price, and total revenue

Understand that total revenue is the product of the price and the quantity demanded (Total Revenue = Price × Quantity Demanded). When the price changes, analyzing the PED helps in understanding the subsequent change in total revenue. The relationship can be expressed as follows: - If PED > 1, demand is elastic, and a price increase will result in a decrease in total revenue. - If PED = 1, demand is unitary elastic, and a price increase will have no effect on total revenue. - If PED < 1, demand is inelastic, and a price increase will result in an increase in total revenue.
04

Apply the knowledge of inelastic demand

As the exercise specifies that the demand is inelastic, we know that the PED < 1. In this case, when the price is raised, the total revenue will increase according to the relationship mentioned in Step 3. Therefore, the correct answer is: a) rise

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Most popular questions from this chapter

During a very bad recession the nation's disposable income fell by 10 percent, while its consumption of a certain good rose by 5 percent. That good was good. (LO4) a) a complementary b) a substitute c) a normal good d) an inferior good

About how much of the tax is paid by consumers in the form of higher prices? (LO7) a) 10 cents d) 50 cents b) 20 cents e) 65 cents c) 35 cents

When demand is relatively inelastic and supply is relatively elastic, the burden of a tax will be borne ( \(\mathrm{OO})\) a) mainly by sellers b) mainly by buyers c) equally between sellers and buyers d) it is impossible to determine the relative burdens of the tax

The imposition of a tax (LO7) a) raises both supply and demand b) lowers neither supply nor demand c) lowers only supply d) lowers only demand

Over time the supply of a particular good or service tends to (I.05) a) become more elastic b) become less clastic c) stay about the same
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