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(Categories of Price Elasticity of Demand) For each of the following absolute values of price elasticity of demand, indicate whether demand is elastic, inelastic, perfectly elastic, perfectly inelastic, or unit elastic
(Categories of Price Elasticity of Demand) For each of the following absolute values of 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.
Absolute Value Elasticity Effect of Price Increase
a ED = 2.5
b ED = 1.0
c ED = ∞
d ED = 0.8
Expert Solution
a) Elastic - As it is greater than 1.
Total revenue will decrease as % decrease in quantity demanded will be greater than % increase in price.
b) Unit Elastic
Total revenue will remain unchanged.
c) Perfectly Elastic
Total revenue will decrease to zero as people will stop consuming the good.
d) Inelastic
Total revenue will increase.
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