When the price of ulcer medication increased by $20, the revenue of a drug company selling the medication increased by $10 million. Thus, it can be said that the company's elasticity of demand is:
A)equal to zero.
B)greater than one.
C)less than one.
D)infinitely large.
E)equal to one.

Question

Quizplus · Accepted Answer

The increase in price ($20) resulted in an increase in revenue ($10 million), which shows that demand for the medication is relatively inelastic (less responsive to price changes). This means that the elasticity of demand is less than one. If the demand were unit elastic (equal to one), a $20 increase in price would result in a $20 decrease in quantity demanded, resulting in the same revenue. Therefore, the answer is (C) less than one.

When the Price of Ulcer Medication Increased by $20, the Revenue