Question

You own a small store. Your cashier thinks you should lower prices to increase your total revenue and your friend thinks you should increase prices to increase your total revenue. The cashier thinks the price elasticity of demand is ________ and the friend believes the price elasticity of demand is ________.
A. elastic;inelastic
B. inelastic; elastic
C. elastic; elastic
D. unit elastic; elastic

Answer 1

Answer:

A. elastic; inelastic

Explanation:

Price elasticity of demand refers to degree of responsiveness of quantity demanded of a good with respect to a change in the price. It is mathematically expressed as:

$\frac{dQ}{dP} \ *\ \frac{p}{q}$

wherein dQ= Change in quantity demanded

              dP = Change in price

              p = Original Price

              q = Original quantity

Total revenue refers to total receipts of a firm from the sale of a good.

When price elasticity of demand is less than 1, it refers to inelastic demand which further means, the change in quantity demanded is less w.r.t change in price.

Similarly, when price elasticity of demand is greater than 1, it signifies change in quantity demanded is more w.r.t change in the price.

In the given case, the cashier thinks lowering prices will increase the total revenue. This indicates the cashier believes the demand to be elastic.

Similarly, the friend's belief of increased prices leading to increased total revenue signifies inelastic demand.