CFA Practice Question

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CFA Practice Question

When demand is elastic, a decrease in price will ______

A. increase a firm's total revenue and decrease quantity demanded.
B. increase a firm's total revenue and increase quantity demanded.
C. decrease a firm's total revenue and increase quantity demanded.
Correct Answer: B

Lower price leads to higher quantity demanded, and an elastic demand curve results in higher revenue when price decreases.

User Contributed Comments 6

User Comment
rfvo Not if the % decrease in price is more than the % increase in demand.....proven

1 = £10 demand is 50 £500
30% drop 10% increase
1 = £7 demand is 55 total rev: £385
ilgibe Yep, an inelastic demand...
pepper The question had clearly stated it is ELASTIC
yesandy11 "If a price cut increases total revenue, demand is elastic."
denisw123 if demand is perfectly elastic, all quantity is being consumed at the prevailing price => any reduction in price will not lead to any increase in
Huricane74 The purpose of the question is the understand the cause and affect relation of changes in price for products that are elastic.

That is why the question states, "When demand is elastic."

We can get into all sorts of what is situations. However, the fundamental relationship of a product or service that is elastic - means that people buy more of an elastic product when the price declines, leading to revenue gain.

The vice versa also applies, people buy less of a product when the price increases.

Good examples include similar food items in a grocery store. For example, you have tooth paste that is almost identical form two different companies. One brand is a few cents cheaper, so people buy more off the cheaper brand than the other brand.
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