ACCA BT · Chapter 3 · Question 1 of 11
When the price of a product rises from $20 to $22, the quantity demanded falls from 5,000 units to 4,400 units. Using percentage changes based on the original price and quantity, what is the price elasticity of demand (ignoring the minus sign) and what happens to total revenue?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) 1.2; total revenue falls
Explanation
Percentage change in quantity = (4,400 - 5,000) / 5,000 = -12%. Percentage change in price = (22 - 20) / 20 = +10%. PED = 12% / 10% = 1.2, so demand is price elastic. Total revenue falls from $100,000 (5,000 x $20) to $96,800 (4,400 x $22), which is consistent with elastic demand: a price rise reduces revenue. The figure 0.83 results from dividing the price change by the quantity change.
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