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:

Total revenue will increase because the price is higher.

Total revenue will decrease.

Total revenue will remain unchanged.

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

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.

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