Question

Suppose that over one range of​ prices, the absolute value of the price elasticity of demand varies from 15.0 to​ 2.5, and over another range of​ prices, the absolute value of the price elasticity of demand varies from 1.5 to 0.75. What can you say about total revenue and the total revenue curve over these two ranges of the demand curve as price​ falls?

Answer 1

Answer:

In the first range of prices (with PED 15 - 2.5) as the price of the good or service falls, total revenue should increase. Imagine that a 1% reduction in price will result in a 15% increase in quantity demanded. The same happens when PED = 2.5, since a 1% reduction will increase quantity demanded by 2.5%.

e.g. price = $100, quantity demanded = 100, total revenue = $10,000

• price falls to $99, quantity demanded increases to 115, total revenue = $11,385
• price falls to $99, quantity demanded increases to 102.5, total revenue = $10,147.50

On the other range (PED = 1.5 - 0.75) as the price of the good or service falls, at first total revenue will increase but then it will decrease.

e.g. price = $100, quantity demanded = 100, total revenue = $10,000

• price falls to $99, quantity demanded increases to 101.5, total revenue = $10,048.50
• price falls to $99, quantity demanded increases to 100.75, total revenue = $9,974.25