Suppose that the government has raised by $10 a per-carat tax rate it imposes on diamonds in an effort to influence production
1 answer:
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Answer:
Option (b) is correct.
Explanation:
Given that,
Initial price of good A = $50
Initial quantity demanded of good A = 500 units
New price of good A = $70
New quantity demanded of good A = 400 units
Average quantity demanded:
= (New + Initial) ÷ 2
= (400 + 500) ÷ 2
= 450 units
Change in quantity demanded:
= New - Initial
= 400 units - 500 units
= -100 units
Average price level:
= (New + Initial) ÷ 2
= (70 + 50) ÷ 2
= $60
Change in price level:
= New - Initial
= $70 - $50
= $20
Therefore, the price elasticity of demand for good A is as follows:
=
=
=
= -0.67
Total revenue before price increase:
= quantity demanded of good A × price of good A
= 500 units × $50
= $25,000
Total revenue after price increase:
= quantity demanded of good A × price of good A
= 400 units × $70
= $28,000
Therefore, there is an increase in total revenue with increase in the price level.