Question

1. What is the connection between elasticity and total revenue?

2. How do substitute and complementary goods affect the demand for a good.?

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Answer 1

Answer:

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)

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)

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

Explanation: