Suppose that an increase in the price of a good leads to an increase in total revenue. Ignoring other factors (like supply), at its current price the good must be:Group of answer choicesinferior.price-inelastic.perfectly price-elastic.price-elastic.
Question
Suppose that an increase in the price of a good leads to an increase in total revenue. Ignoring other factors (like supply), at its current price the good must be:Group of answer choicesinferior.price-inelastic.perfectly price-elastic.price-elastic.
Solution
The answer is price-inelastic.
Here's why:
Total revenue is calculated as the price of the good multiplied by the quantity sold. If an increase in price leads to an increase in total revenue, it means that the quantity sold did not decrease proportionately to the increase in price.
In other words, the percentage change in quantity demanded is less than the percentage change in price. This is the definition of a good that is price inelastic.
Price elasticity of demand measures the responsiveness of quantity demanded to a change in price. If a good is price inelastic, it means that demand is not very responsive to changes in price.
So, if an increase in price leads to an increase in total revenue, the good must be price inelastic.
Similar Questions
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