Refer to the graph above and assume that the areas of the boxes are the same.Consider a situation where price increases from P₃ to P₄.In this price range,demand is relatively: A) inelastic because the loss in total revenue (areas E + F + G)is greater than the gain in total revenue (area A). B) elastic because the loss in total revenue (areas E + F + G)is greater than the gain in total revenue (area A). C) elastic because the loss in total revenue (area A)is greater than the gain in total revenue (areas E + F + G). D) inelastic because the loss in total revenue (area A)is greater than the gain in total revenue (areas E + F +

Question

Quizplus · Accepted Answer

In the given graph, price elasticity of demand is defined as the ratio of the percentage change in quantity demanded to the percentage change in price. In the given price range, when the price increases from P₃ to P₄, the quantity demanded decreases from 40 to 20. Therefore, the percentage change in quantity demanded is (20-40)/40 = -0.5 or -50%, and the percentage change in price is (14-13)/13 = 0.077 or 7.7%. The price elasticity of demand is therefore (-50%/7.7%) = -6.49. Since the absolute value of price elasticity of demand is greater than 1, demand is elastic in this price range. This means that the loss in total revenue (areas E + F + G) due to the decrease in quantity demanded is greater than the gain in total revenue (area A) due to the increase in price. Hence, the best choice is B.

Refer to the Graph Above and Assume That the Areas