p is in dollars and q is the number of units. Find the elasticity of the demand function at , and use it to determine how a price increase will affect total revenue.
A) Since the demand is elastic, an increase in price will decrease the total revenue.
B) Since the demand is elastic, an increase in price will increase the total revenue.
C) Since the demand is inelastic, an increase in price will decrease the total revenue.
D) Since the demand is inelastic, an increase in price will increase the total revenue.
E) No change in revenue.

Question

p is in dollars and q is the number of units. Find the elasticity of the demand function  at  , and use it to determine how a price increase will affect total revenue. ​
A) Since the demand is elastic, an increase in price will decrease the total revenue. 
B) Since the demand is elastic, an increase in price will increase the total revenue. 
C) Since the demand is inelastic, an increase in price will decrease the total revenue. 
D) Since the demand is inelastic, an increase in price will increase the total revenue. 
E) No change in revenue.

Quizplus · Accepted Answer

The elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. In this case, the elasticity of demand is -3 ((60-40)/40)/((2.5-3)/3)). Since the elasticity of demand is greater than 1, demand is considered elastic. According to the law of demand, when the price increases, the quantity demanded decreases. Therefore, when a price increase occurs, the decrease in the quantity demanded will be greater than the increase in price, resulting in a decrease in total revenue.

P Is in Dollars and Q Is the Number of Units