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Doctors Medicines MCQs Q&A

Which one of the following sets is incorrect to show the inter-relationships among price elasticity coefficient, change in price and change in total revenue ? Price elasticity coefficient Change in price Change in Total Revenue 1) Zero Increase Decrease Increase Decrease (2) Less than 1 Increase Decrease Decrease Increase (3) Equal to 1 Increase Decrease No change No change (4) More than 1 Increase Decrease Decrease Increase  

Which one of the following sets is incorrect to show the inter-relationships among price elasticity coefficient, change in price and change in total revenue ? Price elasticity coefficient Change in price Change in Total Revenue 1) Zero Increase Decrease Increase Decrease (2) Less than 1 Increase Decrease Decrease Increase (3) Equal to 1 Increase Decrease No change No change (4) More than 1 Increase Decrease Decrease Increase   Correct Answer (2)

The relationship between elasticity of demand and a firm's total revenue is an important one.

  1. When demand is inelastic – a rise in price leads to a rise in total revenue – a 20% rise in price might cause demand to contract by only 5% (Ped = -0.25)
  2. When demand is elastic – a fall in price leads to a rise in total revenue - for example a 10% fall in price might cause demand to expand by only 25% (Ped = +2.5)
  3. When demand is perfectly inelastic (i.e. Ped = zero), a given price change will result in the same revenue change, e.g. a 5 % increase in a firm's prices results in a 5 % increase in its total revenue

Change in the market

What happens to total revenue?

Ped is inelastic (<1) and a firm raises its price.

Total revenue increases

Ped is elastic (>1) and a firm lowers its price.

Total revenue increases

Ped is elastic (>1) and a firm raises the price

Total revenue decreases

Ped is unit elastic (=1) and a firm raises the price

Total revenue remains the same

Therefore, from the above explanation, Option 2 is the correct answer.

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