Say the demand curve for cigarettes was given by Q = 164 - 0.38P. When P = 20, a further increase in the price will

Question

Quizplus · Accepted Answer

When P = 20, Q = 164 - 0.38(20) = 155.2. 
To find the effect of a price increase on total revenue, we need to consider the price elasticity of demand. 
In this case, the price elasticity of demand can be calculated as: 
E = (% change in Q) / (% change in P) = [(Q2 - Q1) / ((Q2 + Q1)/2)] / [(P2 - P1) / ((P2 + P1)/2)] 
Assuming a small price increase from $20 to $21: 
E = [(Q2 - Q1) / ((Q2 + Q1)/2)] / [(P2 - P1) / ((P2 + P1)/2)] 
E = [(153.6 - 155.2) / ((153.6 + 155.2)/2)] / [(21 - 20) / ((21 + 20)/2)] = -0.44 
Since the price elasticity of demand is greater than 1, we know that total revenue will decrease when the price of cigarettes increases. Therefore, the correct answer is B) decrease total revenue.

Say the Demand Curve for Cigarettes Was Given by Q