Krispy Kreme raises the price of its donuts. The price elasticity of demand for Krispy Kreme donuts equals 5.0. What happens to Krispy Kremes' total revenue?
A) It becomes negative.
B) It increases.
C) Nothing.
D) It decreases.
E) It might change, but more information is needed to determine if it increases, decreases or does not change.

Question

Quizplus · Accepted Answer

A price elasticity of demand of 5.0 indicates that Krispy Kreme's donut demand is quite elastic, meaning that a price increase will result in a proportionally larger decrease in demand. Therefore, when Krispy Kreme raises its donut prices, its total revenue will decrease.

Krispy Kreme Raises the Price of Its Donuts