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.

Question

Quizplus · Accepted Answer

The fact that a 10% price cut leads to a 20% increase in demand implies that the percentage change in quantity demanded is greater than the percentage change in price. This indicates that demand is elastic. When a firm reduces the price of a good in a competitive market with elastic demand, the total revenue will increase. Therefore, the dealer will sell more bicycles and earn more revenue by cutting the price by 10%.

Consider the Market for Bicycles