Suppose that over one range of prices, the absolute value of the price elasticity of demand varies from 15.0 to 2.5, and over another range of prices, the absolute value of the price elasticity of demand varies from 1.5 to 0.75.
Part 2
What can you say about total revenue and the total revenue curve over these two ranges of the demand curve as price falls?
Part 3
A.
In the first case total revenue rises and in the second case total revenue rises and then falls.
B.
In the first case total revenue rises and in the second case total revenue rises.
C.
In the first case total revenue falls and in the second case total revenue falls and then rises.
D.
In the first case total revenue falls and in the second case total revenue falls.
E.
There is insufficient information to determine the effect on total revenue.
The correct answer is E. There is insufficient information to determine the effect on total revenue.
The changes in the absolute value of price elasticity of demand only provide information about the responsiveness of quantity demanded to changes in price. They do not provide enough information to determine the direction or magnitude of the changes in total revenue. Total revenue depends on both price and quantity, and without information about changes in quantity, we cannot determine the effect on total revenue.
something isn't right.
Apologies for the confusion. Given the information provided, we can actually make a conclusion about total revenue.
Based on the information provided, we know that as the absolute value of the price elasticity of demand increases (from 15.0 to 2.5), the demand becomes more elastic. This implies that as prices fall within this range, the quantity demanded will increase at a faster rate.
Similarly, for the second range where the absolute value of the price elasticity of demand varies from 1.5 to 0.75, as the elasticity decreases, the demand becomes less elastic. This means that as prices fall within this range, the quantity demanded will increase at a slower rate.
Now, when prices fall, the change in quantity demanded will depend on both the elasticity and the initial quantity demanded. However, because we are only given information about the range of elasticity and not about the initial quantity demanded, we cannot determine the exact effect on total revenue.
Therefore, the correct answer for Part 2 is E. There is insufficient information to determine the effect on total revenue.
Demand is elastic when the absolute value of the price elasticity of demand exceeds 1, and over the elastic range of a demand curve, a decrease in price increases total revenues. Demand is inelastic when the absolute value of the price elasticity of demand is less than 1, and over this range of a demand curve, an increase in price raises total revenues. Finally, demand is unit-elastic when the absolute value of the price elasticity of demand equals 1, and over this range of a demand curve, a change in price does not affect total revenues.
Apologies for the earlier incorrect response.
Based on the information provided, we can conclude the following about total revenue and the total revenue curve over the two ranges of the demand curve as price falls:
Part 2: When the absolute value of the price elasticity of demand is between 15.0 to 2.5, demand is considered to be elastic. In this case, a decrease in price will lead to an increase in total revenue. This is because the percentage increase in quantity demanded will be greater than the percentage decrease in price, resulting in a net increase in total revenue.
Part 3: When the absolute value of the price elasticity of demand is between 1.5 to 0.75, demand is considered to be inelastic. In this case, an increase in price will lead to an increase in total revenue. This is because the percentage increase in price will be greater than the percentage decrease in quantity demanded, resulting in a net increase in total revenue.
So, the correct answer for Part 3 is B. In the first case, total revenue rises, and in the second case, total revenue also rises.
Based on the information provided, we can determine the effect on total revenue as price falls in the two ranges of the demand curve as follows:
Part 2: As the absolute value of the price elasticity of demand varies from 15.0 to 2.5, we can conclude that demand is relatively elastic in this range. When price falls in this range, the change in quantity demanded will be relatively large compared to the change in price. This means that total revenue will increase as price falls in this range.
On the other hand, as the absolute value of the price elasticity of demand varies from 1.5 to 0.75, we can conclude that demand is relatively inelastic in this range. When price falls in this range, the change in quantity demanded will be relatively small compared to the change in price. This means that total revenue will initially increase but eventually decrease as price falls in this range.
Therefore, the correct answer for Part 3 is:
A. In the first case, total revenue rises and in the second case, total revenue rises and then falls.
To determine the effect of a price decrease on total revenue, we need to consider the concept of price elasticity of demand. Price elasticity of demand measures the responsiveness of the quantity demanded to a change in price.
In general, if the absolute value of the price elasticity of demand is greater than 1, demand is considered elastic, which means that a price decrease will lead to an increase in total revenue. Conversely, if the absolute value of the price elasticity of demand is less than 1, demand is considered inelastic, and a price decrease will result in a decrease in total revenue.
Given that in the first range of prices the absolute value of the price elasticity of demand varies from 15.0 to 2.5, and in the second range it varies from 1.5 to 0.75, we can conclude the following:
Part 2:
In the first range, where the absolute value of the price elasticity of demand is relatively high (15.0 to 2.5), a decrease in price will have a significant impact on total revenue. As price falls, the quantity demanded will likely increase enough to outweigh the decrease in price, resulting in an overall increase in total revenue. This suggests that the total revenue curve will rise.
In the second range, where the absolute value of the price elasticity of demand is relatively low (1.5 to 0.75), a decrease in price will have a smaller impact on total revenue. The increase in quantity demanded may not be enough to compensate for the decrease in price, resulting in a decrease in total revenue. This indicates that the total revenue curve will rise initially, but then fall as price continues to decrease.
Part 3:
Based on the above analysis, we can conclude that the answer would be option C: In the first case (range with high price elasticity of demand), total revenue rises, and in the second case (range with low price elasticity of demand), total revenue rises initially and then falls.