For each of the following cases, what is the expected impact on the total revenu

Question

For each of the following cases, what is the expected impact on the total revenue of the firm? Explain your reasoning.

Price elasticity of demand is known to be -0.5, and the firm raises price by 10 percent.

Price elasticity of demand is known to be -2.5, and the firm lowers price by 5 percent.

Price elasticity of demand is known to be -1.0, and the firm raises price by 1 percent.

Price elasticity of demand is known to be 0, and the firm raises price by 50 percent.

Explanation / Answer

Elasticity = (% change in quantity / % change in price) % change in quantity = Elasticity * % change in price If your product has elastic demand (e>0), you can increase your revenue by decreasing the price of that good. P will decrease, but Q will increase at a greater rate, thus increasing total revenue. If the product is inelastic(e Quantity will decrease by 5% but revenue will increase as demand is inelastic Price elasticity of demand is known to be -2.5, and the firm lowers price by 5 percent.=> Quantity will decrease by 12.5% and revenue will decrease as demand is elastic. Price elasticity of demand is known to be -1.0, and the firm raises price by 1 percent.=> Quantity will decrease by 1% and revenue will not change as demand is unitary elastic. Price elasticity of demand is known to be 0, and the firm raises price by 50 percent..=> Quantity will not change and revenue will increase as prices have increased.

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