Question
Which of the following statements regarding the concept
of elasticity of demand is correct: A.In the case of unitary elastic demand, total revenue remains unchanged with price changes. B.If the price elasticity of demand is greater than 1, a decrease in price increases total revenue C.Perfectly elastic demand implies that with increase in price, the total revenue increases. Which of the statements given above are correct?Solution
• Statement A is correct: When demand is unitary elastic (elasticity = 1), a rise or fall in price results in proportionate changes in quantity demanded, so total revenue remains constant. • Statement B is correct: When the price elasticity of demand exceeds 1, even small price changes lead to proportionately larger changes in quantity demanded, making the demand elastic. When demand is elastic, a decrease in price increases total revenue, and an increase in price decreases total revenue. • Statement C is incorrect: A perfectly elastic demand curve means that at a particular price, demand is infinite, but if the price changes, demand falls to zero. If the seller increases the price even slightly the quantity demanded becomes zero and therefore, total revenue becomes zero.
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