if demand is unit elastic (the elasticity is 1), a 1% price cut increases the qu
ID: 1230171 • Letter: I
Question
if demand is unit elastic (the elasticity is 1), a 1% price cut increases the quantity sold by 1% and total revenue does not change. the question is: Assume the initial price is 1 and the initial quantity demanded is 1, thus the total revenue is 1. Now suppose if the price increases by 1%, which is 1.01. Because of the unit elasticity, the quantity demanded will decrease by 1%, which is 0.99. Therefore, the total revenue is 1.01*0.99=0.9999<1. It seems that the total revenue does change! Can you figure it out why the argument is wrong?PS: You don't need any calculus to answer this question! A very simple question!
Explanation / Answer
Price elasticity of demand is the quantitive measure of consumer behavior that indicates the quantity of demand of a product or service depending on its increase or decrease in price. Price elasticity of demand can be calculated by the percent change in the quantity demanded by the percent change in price. Price elasticity of demand is determined by the price of the item or service, availability of alternative goods, amount of time being measured, consumer income and whether the item or service is considered to be a necessity or a luxury.
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