Suppose there is an increase in the cost of resources used in the production of good A. Then
A)if the price of A rises, we know the demand for A is elastic.
B)if the total revenue from sales of A rises, we know the demand for A is elastic.
C)if the total revenue from sales of A falls, we know the demand for A is elastic.
D)total revenue will increase because the price of A must rise.
E)total revenue must fall because the quantity bought and sold of A must fall.

Question

Quizplus · Accepted Answer

If the cost of resources used in the production of good A increases, the producer will need to increase the price of A in order to maintain the same level of production. If the demand for A is elastic, the increase in price will lead to a greater percentage decrease in quantity demanded, causing total revenue to fall. Therefore, if the total revenue from sales of A falls, we know that the demand for A is elastic. Option A is incorrect because an increase in the price of A alone does not necessarily indicate whether the demand for A is elastic or inelastic. Option B is incorrect because an increase in total revenue does not necessarily indicate whether the demand for A is elastic or inelastic. Option D is incorrect because total revenue may or may not increase depending on the elasticity of demand. Option E is incorrect because we cannot necessarily assume that both the quantity bought and sold of A must fall simply because the cost of resources used in production increases.

Suppose There Is an Increase in the Cost of Resources