A business raises its price from £20 to £22 and sales volume falls from 1,000 to 850 units. What is the price elasticity of demand and what happens to total revenue?
Answer and explanation
Correct answer: D. -1.5, so demand is elastic and revenue falls
- Step 1: Percentage change in price = +10%. Percentage change in quantity = -15%.
- Step 2: Elasticity = -15% / 10% = -1.5, so demand is elastic (the size is above 1).
- Step 3: Revenue changes from £20,000 to £22 × 850 = £18,700, so revenue falls.
Answer
-1.5, so demand is elastic and revenue falls.
Why not the others: With elastic demand, a price rise reduces revenue. -0.67 divides the percentages the wrong way round. Both the inverted ratio and the direction of revenue are wrong.
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