When the price of penicillin tablets increases by $5 per dozen, the drug company's revenue increases by $6 million.Its elasticity of demand (in absolute terms) must be
A)zero.
B)greater than one.
C)less than one.
D)infinitely large.

Question

Quizplus · Accepted Answer

The formula for elasticity of demand is percentage change in quantity demanded divided by percentage change in price. In this case, we know the price increased by $5 and the revenue increased by $6 million, but we do not know the original price or quantity demanded. Therefore, we cannot calculate the exact value of elasticity. However, we can use the information given to make an educated guess. The fact that the revenue increased when the price increased suggests that demand is relatively inelastic (i.e. the percentage change in quantity demanded is less than the percentage change in price). Therefore, the elasticity of demand must be less than one.

When the Price of Penicillin Tablets Increases by $5 Per