ExpertMedium1 markMultiple Choice
CPA · Question 15 · Area I: Business Analysis
A product has a price elasticity of demand of -1.5. If the company increases the price of the product by 10%, what will be the likely impact on total revenue?
A product has a price elasticity of demand of -1.5. If the company increases the price of the product by 10%, what will be the likely impact on total revenue?
Answer options:
A.
Total revenue will increase.
B.
Total revenue will decrease.
C.
Total revenue will remain unchanged.
D.
Quantity demanded will increase by 15%.
How to approach this question
Interpret elasticity: |E| > 1 is Elastic. |E| < 1 is Inelastic. If Elastic: Price and Revenue move in OPPOSITE directions. If Inelastic: Price and Revenue move in SAME direction.
Full Answer
B.Total revenue will decrease.✓ Correct
Price Elasticity of Demand = % Change in Quantity / % Change in Price. <br/>-1.5 = % Change Q / +10%. <br/>% Change Q = -15%.<br/>Revenue = Price x Quantity. <br/>New Revenue = (1.10 P) x (0.85 Q) = 0.935 PQ. <br/>Revenue decreases to 93.5% of the original level.
Common mistakes
Confusing elastic and inelastic rules.
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