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Chapter 4: Problem 2

Does an increase in price necessarily bring about a higher total revenue?

Short Answer

Expert verified
An increase in price does not necessarily bring about a higher total revenue. This depends on the price elasticity of demand for the product in question.

Step by step solution

01

Understand price elasticity of demand

Price elasticity of demand is a measure of the responsiveness of quantity demanded to changes in price. It's calculated as the percentage change in quantity demanded divided by the percentage change in price. If the absolute value of this measure is greater than 1, the product is 'elastic' and sales are sensitive to price. If it’s less than 1, the product is 'inelastic' and sales are not very sensitive to price.
02

Analyze how price impacts revenue with elastic demand

For products with elastic demand, an increase in price results in a proportionally larger decrease in quantity demanded. Therefore, total revenue (price x quantity) decreases.
03

Analyze how price impacts revenue with inelastic demand

For products with inelastic demand, an increase in price results in a proportionally smaller decrease in quantity demanded. Therefore, total revenue (price x quantity) increases.
04

Understand when price change doesn't affect revenue

If the price elasticity of demand is 1 (unit elastic), a percentage increase in price is completely offset by the same percentage decrease in quantity. Therefore, total revenue remains the same.

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