Question

Suppose a decrease in the supply of bottled water resulted in a decrease in revenue. This indicates that A. the demand for bottled water is price inelastic in the price range considered. B. the supply of bottled water is price inelastic in the price range considered. C. the supply of bottled water is price elastic in the price range considered. D. the demand for bottled water is price elastic in the price range considered.

Answer 1

Answer:

D. the demand for bottled water is price elastic in the price range considered.

Explanation:

• Demand elasticity can be express as the sensibility of change in the demanded quantity when prices change.
• Mathematically , can be written as $\eta=\frac{\triangle Q\%}{\triangle P\%} =\frac{\partial{Q^d}}{\partial{P}} \times{\frac{P}{Q} }$, where $P$ is the price and $Q$ is the quantity demanded. This means that elasticity reflects what is the percentage change in quantity $\triangle Q\%$ in the presence of a percentage change $\triangle P\%$ in prices.
• A decrease in supply would tipically rise prices, ceteris paribus.
• If the decrease in supply was the cause of a decrease in revenues, it means that the percentage change in demanded quantity as a consequence of the rise in prices was bigger than the change in prices.
• To see it more clearly, remember that the seller's revenue can be express as $revenue=P\times{Q}$. If prices increased, but revenues fall, then $Q$ decreases in a bigger percentage than the increased in prices.
• If $\triangle Q\%>\triangle P\%$, then $\eta>1$, wich is consistent with an elastic range of demand.