US CMA Part 2 · Chapter 6 · Question 16 of 22
If demand for a product is price elastic, what is the effect of a price increase on total revenue?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Total revenue decreases, because the percentage fall in quantity exceeds the percentage rise in price
Explanation
With elastic demand (elasticity greater than 1 in absolute value), quantity demanded is highly responsive to price, so a price increase reduces quantity proportionately more and total revenue falls. Revenue rises after a price increase only when demand is inelastic, and is unchanged when elasticity equals exactly 1 (unit elastic).
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