Consider the demand curve in the graph shown. Suppose the price is initially $6 and then falls to $4. Which of the following statements is true?
A) The quantity effect will outweigh the price effect, and total revenue will rise.
B) The quantity effect will outweigh the price effect, and total revenue will fall.
C) The price effect will outweigh the quantity effect, and total revenue will rise.
D) The price effect will outweigh the quantity effect, and total revenue will fall.

Question

Consider the demand curve in the graph shown. Suppose the price is initially $6 and then falls to $4. Which of the following statements is true?
A) The quantity effect will outweigh the price effect, and total revenue will rise. 
B) The quantity effect will outweigh the price effect, and total revenue will fall. 
C) The price effect will outweigh the quantity effect, and total revenue will rise. 
D) The price effect will outweigh the quantity effect, and total revenue will fall.

Quizplus · Accepted Answer

According to the law of demand, as the price falls, quantity demanded increases. Therefore, a decrease in price from $6 to $4 will result in an increase in quantity demanded. However, the decrease in price will also lead to a decrease in total revenue, since the price effect (lowering price per unit) outweighs the quantity effect (selling more units due to lower price). This is known as the price elasticity of demand being greater than 1, which indicates that the demand for the product is elastic. Therefore, the correct answer is D.

Consider the Demand Curve in the Graph Shown