Consider the market for bicycles. If a dealer cuts prices by 10 percent and sells 20 percent more bikes, then demand for bicycles is:
A) inelastic, and total revenue will increase.
B) elastic, and total revenue will increase.
C) inelastic, and total revenue will decrease.
D) elastic, and total revenue will decrease.
E) unit elastic, and total revenue will remain the same.

Question

Quizplus · Accepted Answer

The increase in quantity demanded by 20 percent shows that consumers are responsive to the price change, indicating elasticity of demand. Furthermore, the increase in quantity demanded by a larger percentage than the decrease in price (20% > 10%) also indicates elasticity of demand. When demand is elastic, a decrease in price leads to an increase in total revenue, as the increase in quantity demanded outweighs the decrease in price.

Consider the Market for Bicycles