A good has a price elasticity of demand of . The price rises by . What is the effect on quantity demanded and on total revenue?
Answer and explanation
Correct answer: C. Quantity falls by about and total revenue falls
- Step 1: Quantity change is elasticity times price change: . Step 2. Revenue is price times quantity: , which is lower. **Answer: quantity falls and revenue falls. Why not the others:** An elasticity of absolute value above means the quantity effect outweighs the price effect.
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