A product has a price elasticity of demand of -1.5. If the company increases the price of the product 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.

Quantity demanded will increase by 15%.

How to approach this question

Interpret elasticity: |E| > 1 is Elastic. |E| < 1 is Inelastic. 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

Price Elasticity of Demand = % Change in Quantity / % Change in Price. -1.5 = % Change Q / +10%. % Change Q = -15%. Revenue = Price x Quantity. New Revenue = (1.10 P) x (0.85 Q) = 0.935 PQ. Revenue decreases to 93.5% of the original level.

Common mistakes

Confusing elastic and inelastic rules.

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