ExpertMedium1 markMultiple Choice
CPA · Question 11 · Area I: Business Analysis
A company sells a luxury good with a price elasticity of demand of -2.5. If the company increases the price of the product by 10%, what is the expected impact on total revenue?
A company sells a luxury good with a price elasticity of demand of -2.5. If the company increases the price of the product by 10%, what is the expected impact on total revenue?
Answer options:
A.
Total revenue will increase because the price is higher.
B.
Total revenue will decrease.
C.
Total revenue will remain unchanged.
D.
Total revenue will increase by 15%.
How to approach this question
Identify if demand is Elastic (|E| > 1) or Inelastic (|E| < 1). If Elastic, Price and Revenue move in OPPOSITE directions. If Inelastic, Price and Revenue move in SAME direction.
Full Answer
B.Total revenue will decrease.✓ Correct
B
Since |Elasticity| = 2.5 (> 1), demand is elastic. A 10% increase in price results in a 25% decrease in quantity demanded. The volume loss outweighs the price gain, causing Total Revenue to fall.
Common mistakes
Thinking higher price always equals higher revenue; confusing elastic and inelastic rules.
Practice the full CPA BAR Practice Exam 3
50 questions · hints · full answers · grading
More questions from this exam
Q01Orion Manufacturing provides the following financial data for the current year:<br/><br/>- Net Sa...HardQ02A manufacturing company uses a standard cost system. For the month of June, the following data is...MediumQ03A financial analyst is reviewing a company's sales data using a visualization tool. The scatter p...MediumQ04TechStart Inc. reports Net Income of $500,000. The income statement includes:<br/>- Depreciation ...MediumQ05A company produces two products, A and B. Under its traditional costing method, the company alloc...Medium