If the price of a good rises by 10 percent and quantity demanded falls by 20 percent,we can predict that
A)The company's total revenue will increase.
B)The company's total profit will rise.
C)The company's total revenue will decrease.

Question

Quizplus · Accepted Answer

The price elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price. In this case, the price elasticity of demand is -20%/10% = -2, meaning that the good has an elastic demand (i.e. a change in price leads to a larger percentage change in quantity demanded). When the price increases, the total revenue of the company will decrease because the increase in price is not enough to offset the decrease in quantity demanded. Therefore, choice C is the correct answer.

If the Price of a Good Rises by 10 Percent