Total revenue will decrease if price Responses
A rises and demand is elastic. rises and demand is elastic.
B rises and demand is unit elastic rises and demand is unit elastic
C rises and demand is inelastic. rises and demand is inelastic.
D falls and demand is unit elastic.
The correct answer and explanation is:
Correct Answer: B) rises and demand is elastic.
Explanation (300 words):
Total revenue is calculated as Price × Quantity Sold. How revenue changes when price changes depends on the price elasticity of demand — a measure of how sensitive quantity demanded is to changes in price.
Elastic demand means that consumers are highly responsive to price changes. Specifically, when demand is elastic, the absolute value of the price elasticity of demand is greater than 1. This means a small increase in price leads to a larger percentage decrease in quantity demanded.
So, if:
- Price rises
- Demand is elastic
Then:
- Quantity demanded drops significantly
- The decrease in quantity outweighs the increase in price
- As a result, total revenue decreases
This is because consumers will reduce their purchases considerably in response to the higher price, and the business will sell fewer units — so much fewer that it more than offsets the extra money per unit.
Let’s visualize with an example:
- Original price: $10
- Original quantity sold: 100 units
- Total revenue: $10 × 100 = $1,000
Now suppose the price rises to $12 (20% increase), but due to elastic demand, quantity sold falls to 70 units (30% decrease):
- New total revenue: $12 × 70 = $840 → Revenue decreases
What about the other options?
- C) Rises and demand is inelastic: Quantity doesn’t fall much, so total revenue increases.
- D) Falls and demand is unit elastic: Revenue stays the same because the percent change in price equals the percent change in quantity.
- A) Rises and demand is unit elastic: Again, revenue remains constant.
Conclusion:
The only scenario where total revenue decreases is when price rises and demand is elastic, which is why option B is correct.