Multiple Choice
Suppose demand is perfectly elastic, and the supply of the good in question decreases. As a result, which of the following will occur?
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4. Elasticity
Price Elasticity of Demand on a Graph
Multiple Choice
If the demand for a good is elastic, which of the following is most likely to occur when the price of the good increases?
A
Total revenue decreases
B
Quantity demanded increases
C
Quantity demanded remains unchanged
D
Total revenue increases
Verified step by step guidance1
Understand the concept of price elasticity of demand, which measures how much the quantity demanded of a good responds to a change in its price. When demand is elastic, the absolute value of the price elasticity of demand is greater than 1.
Recall the relationship between price elasticity and total revenue: Total revenue (TR) is calculated as \(TR = P \times Q\), where \(P\) is price and \(Q\) is quantity demanded.
Analyze what happens when price increases for an elastic good: Since demand is elastic, the percentage decrease in quantity demanded will be greater than the percentage increase in price.
Apply this to total revenue: Because quantity demanded falls proportionally more than the price rises, the overall total revenue will decrease.
Conclude that when demand is elastic and price increases, total revenue decreases, which matches the correct answer.
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