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What is the effect of a 10 percent price increase on total revenue if 1 is...

What is the effect of a 10 percent price increase on total revenue if 1 is less than elasticity and elasticity is less than infinity?

a. Revenue decreases.

b. Revenue does not change.

c. Revenue increases by 10 percent.

d. Revenue increases by less than 10 percent.

e. Revenue drops to 0.

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Answer #1

Given that 1 < Ed < infinity. This implies that demand is elastic and for any given change in price in percentage terms, there is a greater percentage change in quantity demanded. Price is now increased by 10 percent so we expect quantity demanded to fall by a greater than 10 percent. This results in reducing the revenue because fall in quantity is greater than rise in price.

Option A.

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