In price elasticity analysis, if a company cuts its product price by and total sales revenue increases by , what is the demand elasticity?
Answer and explanation
Correct answer: C. Demand is price elastic
- Step 1: When a price reduction causes total revenue to increase, the quantity demanded must have expanded by a larger percentage than the price cut, proving that demand is price elastic (|Ed| > 1). Answer: Demand is price elastic. Why not the others: Inelastic demand causes total revenue to fall when price is cut, unit elastic leaves revenue unchanged, and perfectly inelastic demand causes revenue to drop by the exact percentage of the price cut.
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