Question : When demand is elastic, a decrease in price will result in:
Option 1: A decrease in total revenue.
Option 2: An increase in total revenue.
Option 3: No change in total revenue.
Option 4: An unpredictable change in total revenue.
Correct Answer: An increase in total revenue.
Solution : The correct answer is (b) An increase in total revenue.
When demand is elastic, it means that the quantity demanded is highly responsive to changes in price. In this case, a decrease in price will lead to a proportionally larger increase in the quantity demanded. As a result, the increase in quantity demanded outweighs the decrease in price, leading to an overall increase in total revenue.
This relationship holds true because the percentage increase in quantity demanded (due to the lower price) multiplied by the lower price per unit results in a larger total revenue. Therefore, when demand is elastic, a decrease in price will result in an increase in total revenue.
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