Ceteris paribus,when a firm increases the price of its product,total revenue will:
A) Always increase because the firm will receive more revenue per unit sold.
B) Always decrease because the firm will sell fewer units.
C) Increase if the price elasticity of demand is inelastic.
D) Increase if the price elasticity of demand is elastic.

Question

Quizplus · Accepted Answer

When a firm increases the price of its product, the change in total revenue depends on the price elasticity of demand. If demand is inelastic (i.e. consumers are not very sensitive to changes in price), then an increase in price leads to an increase in total revenue because the increase in price more than offsets the decrease in quantity demanded. However, if demand is elastic (i.e. consumers are very sensitive to changes in price), then an increase in price leads to a decrease in total revenue because the decrease in quantity demanded more than offsets the increase in price. Therefore, answer C is correct.

Ceteris Paribus,when a Firm Increases the Price of Its Product,total