When demand is inelastic, total revenue goes down in proportion to a price increase.
a. true
b. false
The correct answer and explanation is :
The correct answer is:
b. false
Explanation:
When demand is inelastic, the percentage change in quantity demanded is less than the percentage change in price. This means that consumers are relatively unresponsive to price changes. The price elasticity of demand in this case is less than 1 (i.e., ( |E_d| < 1 )).
In the case of an inelastic demand, when the price of a good increases, the decrease in quantity demanded is small compared to the price increase. As a result, total revenue (TR) actually increases, not decreases.
Total revenue is calculated as:
[
TR = P \times Q
]
where:
- P = price of the good
- Q = quantity demanded
For inelastic demand:
- If price increases, quantity demanded falls slightly → TR increases
- If price decreases, quantity demanded rises slightly → TR decreases
This happens because consumers are not very sensitive to price changes, often due to a lack of substitutes or because the good is a necessity (e.g., gasoline, medicine).
Example:
Suppose the price of a life-saving drug increases from $10 to $12, and as a result, quantity demanded falls from 100 units to 95 units.
- Before price increase:
- ( TR = 10 \times 100 = 1000 )
- After price increase:
- ( TR = 12 \times 95 = 1140 )
Since total revenue increased after the price increase, this confirms that demand is inelastic.
Thus, the statement “total revenue goes down in proportion to a price increase when demand is inelastic” is false—in reality, total revenue increases.