A price increase will cause an increase in revenue:
A)when the price effect outweighs the quantity effect.
B)when the quantity effect outweighs the price effect.
C)when demand is perfectly elastic.
D)when demand is unit elastic.

Question

Quizplus · Accepted Answer

A price increase will result in an increase in revenue when the price effect, i.e., the price per unit, outweighs the quantity effect, i.e., the decrease in the quantity demanded due to the price increase. This situation occurs when the demand is inelastic, i.e., consumers are not sensitive to price changes. Hence, option A is the correct answer. Options C and D are not possible because, in a perfectly elastic demand or unit elastic demand, a price increase will result in a decrease in revenue, regardless of the magnitude of price or quantity effect. Option B is also incorrect because a price increase will not result in an increase in revenue when the quantity effect is higher than the price effect.

A Price Increase Will Cause an Increase in Revenue