In which of the following situations will total revenue increase?

• A. The price of a product decreases and demand is inelastic.
• B. The price of a product increases and demand is unit elastic.
• C. The price of a product increases and demand is elastic.
• D. The price of a product decreases and demand is elastic.

Answer: (D)

Verified step by step guidance

1. Recall the definition of price elasticity of demand (PED), which measures how quantity demanded responds to a change in price. It is calculated as \(PED = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}\).
2. Understand the relationship between elasticity and total revenue (TR). Total revenue is \(TR = P \times Q\), where \(P\) is price and \(Q\) is quantity demanded.
3. Analyze how total revenue changes when price changes depending on elasticity: - If demand is elastic (\(|PED| > 1\)), a decrease in price leads to a proportionally larger increase in quantity demanded, so total revenue increases. - If demand is inelastic (\(|PED| < 1\)), a decrease in price leads to a smaller increase in quantity demanded, so total revenue decreases. - If demand is unit elastic (\(|PED| = 1\)), total revenue remains unchanged when price changes.
4. Apply these principles to each situation: - Price decreases and demand is inelastic: total revenue decreases. - Price increases and demand is unit elastic: total revenue stays the same. - Price increases and demand is elastic: total revenue decreases. - Price decreases and demand is elastic: total revenue increases.
5. Conclude that total revenue increases only when the price decreases and demand is elastic, because the increase in quantity demanded more than offsets the lower price.