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Homework answers / question archive / For each of the following absolute values of the price elasticity of demand, indicate whether demand is elastic, inelastic, perfectly elastic, perfectly inelastic or unit elastic
For each of the following absolute values of the price elasticity of demand, indicate whether demand is elastic, inelastic, perfectly elastic, perfectly inelastic or unit elastic. In addition, determine what would happen to total revenue if a firm raised its price in each elasticity range identified.
a. ED = 2.5
b. ED = 1.0
c. ED = ∞∞
d. ED = 0.8
An elasticity of demand of 2.5 is considered elastic, an increase in price should decrease the total revenue. An elasticity of demand of 1.0 is rated unit elastic, an increase in price should cause a proportionate decrease in quantity. This means that an increase in price should increase total revenue. An elasticity of demand of ∞∞ is considered perfectly elastic, an increase in price should decrease total revenue. An elasticity of demand of 0.8 is rated inelastic, an increase in price should increase total revenue. An increase in price decreases total revenue for elastic demands and increases total revenue for inelastic or unit elastic demands.
