In Party Ville, the price elasticity of demand for soda is 0.4, the income elast

Question

In Party Ville, the price elasticity of demand for soda is 0.4, the income elasticity of demand for soda is 0.3, and the cross elasticity of demand for soda with respect to juice is 0.4. The demand for soda iswith respect to the price of a can of soda because theelasticity of demand is less than 1 O A. elastic, income OB. elastic; price C. inelastic, price O D. inelastic, cross O E. inelastic, income An increase in the price of a can of soda wil O A. increase OB. not change O C. decrease total revenue.

Explanation / Answer

Answer : 1) The correct option is C.

From the price elasticity of demand theory we get that if price elasticity of demand is less than 1 then the demand is inelastic. In question it is given that price elasticity of demand is 0.4 which is less than 1. Therefore, here demand is inelastic for soda because of less than 1 price elasticity of demand.

2) The correct option is A.

Because if price rise then obviously total revenue of producers or sellers increase.

For example, let initial price level is $5 and quantity level is 5 units. For this situation total revenue = price ×quantity = 5 × 5 = $25. Now let price level rise and become $7. For 5 units quantity level at price $7 the total revenue = 7 × 5 = $35. Here it is clear that if price rise then total revenue increase.

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