ExpertHard1 markMultiple Choice
CPA · Question 19 · Area I: Business Analysis
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?
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:
A.
Total revenue will increase.
B.
Total revenue will decrease.
C.
Total revenue will remain unchanged.
D.
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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