Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Total revenue will increase because the quantity demanded will increase significantly due to the elasticity of demand.
B
Total revenue will decrease because lower prices always lead to lower total revenue.
C
Total revenue will remain unchanged, as price and quantity demanded will offset each other.
D
Total revenue will fluctuate unpredictably, making it difficult to determine the outcome.
Understanding the Answer
Let's break down why this is correct
Answer
When a firm operates in the elastic range of its demand curve, it means that consumers are very responsive to price changes. If the firm lowers its price significantly, the quantity demanded will increase by a larger percentage than the price decrease. This leads to higher total revenue because the extra sales from the lower price more than compensate for the reduced price per unit. For example, if a store sells a toy for $10 and lowers the price to $8, and as a result, sells 50 more toys, the increase in revenue from those extra sales can greatly exceed the loss from the lower price. Thus, in this situation, total revenue is likely to increase.
Detailed Explanation
When a firm lowers its price in the elastic range, more people want to buy the product. Other options are incorrect because This answer suggests that lower prices always mean lower revenue; This option thinks price and quantity will balance each other out.
Key Concepts
Price Elasticity of Demand
Total Revenue
Monopolistic Competition
Topic
Price Elasticity and Revenue
Difficulty
medium level question
Cognitive Level
understand
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