Question : When demand is inelastic, 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.
Inelastic demand means that the quantity demanded is not very responsive to changes in price. When the price decreases, the percentage change in quantity demanded is relatively smaller compared to the percentage change in price. As a result, the increase in quantity demanded due to the lower price does not fully offset the decrease in price. Therefore, the decrease in price leads to an increase in total revenue.
This relationship holds true because the increase in quantity demanded (although relatively small) multiplied by the lower price per unit results in a larger total revenue.
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