Question

In the market for computers, if the demand curve is elastic and the price of a computer decreases, we expect total revenue to _____. If the demand curve is inelastic and the price of a computer decreases, we expect total revenue to _____.

Answer 1

Answer:

increase

decrease

Explanation:

Price elasticity of demand is the degree of responsiveness of demand to a change in price.

Elastic demand

If a  a given change in price leads to a more than proportional change in quantity demanded, we say that the demand is price elastic. So a decrease in price of the product will increase revenue and vice versa.

Inelastic demand

If a given change in price price leads to a less than proportionate change in quantity demanded, we say that the demand is price inelastic. So a decrease in price we decrease revenue

Answer 2

Answer:

if the demand curve is elastic and the price of a computer decreases, we expect total revenue to INCREASE. If the demand curve is inelastic and the price of a computer decreases, we expect total revenue to DECREASE.

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