Micro question

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Konstantin

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Which of the following statements concerning price elasticity of demand is most accurate?
a. Which of the following statements concerning price elasticity of demand is most accurate?
b. When demand is elastic, a given percentage increase in price will cause a lower percentage reduction in the quantity demanded.
c. When demand is of unitary elasticity, a given percentage increase in price will cause an equal percentage reduction in total revenues.
d. When demand is elastic, the tendency will be toward higher, rather than lower, prices.
 
It must be (a). Now, I don’t know what (a) actually as it seems you have accidently copied out the question in place of the answer! But its not any of the other 3 options.
Its not (b) – When we have elastic demand, the value of PED is greater than 1. This means that for a given % increase in price, there is a greater % increase in quantity demanded. ie, if the PED is -1.3, then a 10% increase in price will lead to a 13% decrease in quantity demanded.
Its not (c) - unitary elasticity means that the % increase in price will be met with the same % decrease in quantity demanded. If we were at an equilibrium P of 10 and Q of 10 giving total revenue of 100, and then if the price rose 10% to 11, then Q would fall 10% to 9. This would give a new revenue of 99, which is NOT 10% less than 100
Its not (d) – elasticity of relates to the responsiveness of quantity demanded to changes in price and not whether a product will have typically “higher” or “lower” prices.
So by a process of deduction, it must be (a), whatever (a) happens to be!
 
Sorry
here is a:
a. When demand is inelastic, a price increase will cause total revenues to fall.
 
yeah that’s wierd.
“With unitary elasticity, the percentage increase in price calls forth an offsetting decrease in demand. If the seller doubles his price, he sells half as much. Similarly, a percentage decrease in price calls forth an offsetting increase in demand. If he halves his price, he sells twice as much. Either way, the seller brings in the same revenue.”
c is definitely wrong.
Seems like a typo. Should be something more like “equal percentage reduction in total sales (ie: units sold)” as opposed to revenues..
does that sound more reasonable?
 
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