A car dealership estimates that the elasticity of demand for its top models is 0.5.If it raises its prices by 10%,
A)quantity demanded will decrease by 5% and total revenue will increase.
B)there will be no change in either quantity demanded or total revenue because demand is inelastic.
C)quantity demanded will decrease by 5% and total revenue will decrease.
D)quantity demanded will decrease by 10% and total revenue will increase.

Question

Quizplus · Accepted Answer

The elasticity of demand is 0.5, meaning if the price increases by 10%, the quantity demanded will decrease by 5% (0.5 * 10%). Since the demand is inelastic (elasticity < 1), total revenue will increase when prices are raised.

A Car Dealership Estimates That the Elasticity of Demand for Its