A product has a price elasticity of demand of -1.5. If the company increases the price by 10%, what will be the likely impact on total revenue?

Answer options:

Total revenue will increase.

Total revenue will decrease.

Total revenue will remain unchanged.

Cannot be determined without cost data.

How to approach this question

Elasticity > 1 (Elastic): Price and Revenue move in OPPOSITE directions. Elasticity < 1 (Inelastic): Price and Revenue move in SAME direction.

Full Answer

B.Total revenue will decrease.✓ Correct

Since demand is elastic (1.5 > 1), the percentage decrease in quantity demanded (1.5 * 10% = 15%) will be larger than the percentage increase in price (10%). Therefore, Total Revenue will fall.

Common mistakes

Confusing elastic and inelastic revenue relationships.

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