Question

When the demand curve for a good is unit elastic, raising the price of the good by 25 percent will change the revenue of the firm by:

Answer 1

Answer: 0%

Explanation:

Elasticity measures the change in demand resulting from a change in price. The law of demand holds that when prices increase, quantity demand would decrease and elasticity is meant to show the magnitude of this change.

A unit elastic good means that prices and quantity demanded change by the same amount. This means that for a unit elastic good, if the price change is a 5% increase, the quantity demanded will decrease by 5%.

In terms of revenue, if the price increases by the same amount that quantity demanded decreases, the effects will cancel out so there will be no revenue effect.