If demand is elastic, how will an increase in price change total revenue? Explain.
Answers
Answer:
Total revenue is price times the quantity of tickets sold (TR = P x Qd).
Explanation:
If demand is elastic at that price level, then the band should cut the price, because the percentage drop in price will result in an even larger percentage increase in the quantity sold—thus raising total revenue. However, if demand is inelastic at that original quantity level, then the band should raise the price of tickets, because a certain percentage increase in price will result in a smaller percentage decrease in the quantity sold—and total revenue will rise. If demand has a unitary elasticity at that quantity, then a moderate percentage change in the price will be offset by an equal percentage change in quantity—so the band will earn the same revenue whether it (moderately) increases or decreases the price of tickets.
Answer:
The key concept in thinking about collecting the most revenue is the price elasticity of demand. ... If demand is elastic at that price level, then the band should cut the price, because the percentage drop in price will result in an even larger percentage increase in the quantity sold—thus raising total revenue.
Elastic: % change in Qd is greater than % change in P
Inelastic: % change in Qd is less than % change in P
Unitary: % change in Qd is equal to % change in P
If demand is: Then