Answer:
if the demand curve is elastic and the price of a computer decreases, we expect total revenue to <u>INCREASE.</u> If the demand curve is inelastic and the price of a computer decreases, we expect total revenue to <u>DECREASE</u>.
Explanation:
Price elasticity of demand measures how a 1% change in price affects the quantity demanded of a product or service.
- If the 1% change in price, changes the quantity demanded in a higher proportion, the PED > 1, it is elastic.
- If the 1% change in price, changes the quantity demanded in a lower proportion, the PED < 1, it is inelastic.
- If the 1% change in price, changes the quantity demanded in the same proportion, the PED = 1, it is unit elastic.
We can use an example to explain how PED affects total revenue:
PED = 1.5
price = $100 and 100 units are sold
total revenue = 100 x $100 = $10,000
price decreases by 20%, so quantity demanded increases by 1.5 x 20% = 30%
so now, price = $80 and 130 units are sold
total revenue = $80 x 130 = $10,400, total revenue increased
another example, PED = 0.5
price = $100 and 100 units are sold
total revenue = 100 x $100 = $10,000
price decreases by 20%, so quantity demanded increases by 0.5 x 20% = 10%
so now, price = $80 and 110 units are sold
total revenue = $80 x 110 = $8,800, total revenue decreased
