If lowering price causes total revenue to rise, what can be said about the price elasticity of demand?

If lowering price causes total revenue to rise, what can be said about the price elasticity of demand?

• A. Inelastic
• B. Unit elastic
• C. Perfectly elastic
• D. Elastic

Answer: (D)

Elastic demand. When lowering the price leads to a higher total revenue, the increase in quantity sold must be larger in percentage than the price drop. That means elasticity is greater than 1. In this case, consumers respond a lot to price changes, so the revenue gain from selling more units outweighs the loss per unit. If demand were inelastic, total revenue would fall after a price cut; if unit elastic, total revenue would stay the same. The perfectly elastic case is a theoretical extreme and doesn’t fit the observed rise in revenue from a price decrease.

Elastic demand. When lowering the price leads to a higher total revenue, the increase in quantity sold must be larger in percentage than the price drop. That means elasticity is greater than 1. In this case, consumers respond a lot to price changes, so the revenue gain from selling more units outweighs the loss per unit. If demand were inelastic, total revenue would fall after a price cut; if unit elastic, total revenue would stay the same. The perfectly elastic case is a theoretical extreme and doesn’t fit the observed rise in revenue from a price decrease.