Question

Every year Christmas tree vendors bring tens of thousands of trees from the forests of New England to New York City and Boston. During the last 2 years, the market has been competitive; as a result, price has fallen by 10 percent. If the price elasticity of demand was -1.3, vendors would lose revenues altogether as a result of a price decline.
A. True
B. False

Answer 1

Answer:

B) False

Explanation:

Since the price elasticity of demand is -1.3, it is considered elastic. That means that a 10% decrease in the price will result in a 13% increase in total quantity sold.

E.g. original price = $100, quantity demanded = 100 trees, total revenue = $10,000

price decreases by 10% to $90, but the quantity demanded increased by 13% to 113 trees, total revenue = $10,170