If demand for Good X is price elastic, then...

Question

BlackTom AI · Accepted Answer

Here is a step-by-step review of each answer option in light of elastic demand for Good X.
Option 1: 'Lowering the price will decrease total revenue.' When demand is price elastic, the percentage increase in quantity demanded from a price cut is greater than the percentage decrease in price, causing total revenue to rise, not fall. This option contradicts the core implication of elasticity greater than one, so it is incorrect.
Option 2: 'Lowering the price will decrease profit.' Profit depends on revenue minus costs. With elastic demand, lowering price increases total revenue, and assuming costs remain constant or do not rise disproportionately, this tends to increase profit rather than decrease it. Unless there are unusual cost structures or fixed costs that change with price, this statement is not consistent with the typical outcome of elastic demand, so it is incorrect.
Option 3: 'Lowering the price will increase total revenue.' This aligns with the definition of price elasticity of demand: when elasticity is greater than 1, a decrease in price leads to a proportionally larger increase in quantity demanded, boosting total revenue. Therefore this statement reflects the correct relationship between price cuts and revenue under elastic demand.
Option 4: 'Lowering the price will leave total revenue unchanged.' An unchanged total revenue would imply elasticity exactly equal to 1 (unitary elasticity) or that quantity change offsets price change perfectly. With price elastic demand, the quantity response is strong enough that revenue changes, so this option is incorrect.

BECO011 Week 2 Extra Practice Question

If demand for Good X is price elastic, then...

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