A business sells soft drinks at $3 a bottle and its current sales are 20,000 bottles per month. The price elasticity of demand for this product is -2. If the price is reduced to $2.70, the change in the total revenue for the business will be:
A) -$3,300
B) +$4,800
C) -$16,800
D) +$4,000

Question

Quizplus · Accepted Answer

The correct answer is A.The price elasticity of demand is -2, which means that a 1% decrease in price will lead to a 2% increase in quantity demanded. If the price is reduced from $3 to $2.70, this represents a 10% decrease in price. Therefore, we can expect quantity demanded to increase by 20%.The current sales are 20,000 bottles per month, so a 20% increase in quantity demanded would lead to sales of 24,000 bottles per month. The new total revenue would be $2.70 * 24,000 = $64,800. The current total revenue is $3 * 20,000 = $60,000. Therefore, the change in total revenue would be $64,800 - $60,000 = $4,800.

A Business Sells Soft Drinks at $3 a Bottle and Its