Assume that the price elasticity of demand is -2 for a certain firm's product.If the firm raises price, the firm's managers can expect total revenue to:
A)Decrease
B)Increase
C)Remain constant
D)Either increase or remain constant depending upon the size of the price increase.

Question

Quizplus · Accepted Answer

When the price elasticity of demand is negative (as is the case here with a value of -2), a price increase results in a decrease in the quantity demanded. Because of the strong responsiveness of buyers to price changes (-2 is a relatively large elasticity value), the decrease in quantity demanded will be proportionately larger than the increase in price, leading to a decrease in total revenue for the firm (since Total Revenue = Price x Quantity). Therefore, the best choice is A, indicating that the firm's managers can expect total revenue to decrease if they raise price.

Assume That the Price Elasticity of Demand Is -2 for a Certain