Assume the price of a good increases from $6 to $7, the total revenue earned inc

Question

Assume the price of a good increases from $6 to $7, the total revenue earned increases from $700 to $790. Based on this information, the price elasticity of demand over this range in output is A. Elastic B. Unit Elastic C. Inelastic D. Perfectly Inelastic Answer
Assume the price of a good increases from $6 to $7, the total revenue earned increases from $700 to $790. Based on this information, the price elasticity of demand over this range in output is A. Elastic B. Unit Elastic C. Inelastic D. Perfectly Inelastic

Explanation / Answer

We have the following relationship between TR and price-

TR=P*Q(P). Partially differentiating with respect to P gives,

dTR/dP = Q(P) + [P*(dQ/dP)] = Q {1+[(P/Q)*(dQ/dP)]} = Q*{1-e} since e= -(dQ/dP)*(P/Q).

Hence dTR/dP = {1-e}*Q.

In the given question, as price increases, TR increases. Therefore dTR/dP>0.

Since Q is a non negative number, we have {1-e}>0,

i.e. e<1.

Hence demand is inelastic.

Answer: C.Inelastic

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