CFA Practice Question
When the price elasticity of demand is inelastic,
A. total revenue increases whether price goes up or down.
B. price and total revenue move in the opposite direction.
C. price and total revenue move in the same direction.
Explanation: Inelastic demand is characterized by the following: a price increase of 10 percent leads to a less than 10 percent decline in demand. As a result, total expenditure on the good under a price increase rises. The opposite is also true: a 10 percent decline in price leads to a less than 10 percent increase in demand. Thus, total expenditure under a price decrease declines. Therefore, price and total expenditure/total revenue move in the same direction.
User Contributed Comments 4
| User | Comment |
|---|---|
| ohmms | Think of a perfectly inelastic demand, which is a straight vertical line. So as price goes up, the revenue definitley goes up (R = P x Q), since (Q)uantity is constant. |
| omf24 | The question though doesn't state perfectly inelastic, just inelastic. |
| bleublau | ohmms just take the extreme case to simplify the question! |
| bleublau | It is about the differentiation question. |