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Price elasticity of demand is -1.0. If output increases A. revenue decreases B. revenue increases OC. price increases D. price decreases O E. Both A and D are correct.

Price elasticity of demand is -1.0. If output increases A. revenue decreases B. revenue increases OC. price increases D. price decreases O E. Both A and D are correct.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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**Price Elasticity of Demand Analysis** The question revolves around the concept of price elasticity of demand, which is given as -1.0. This indicates that the product has unitary elasticity, meaning the percentage change in quantity demanded is equal to the percentage change in price, but in opposite directions. **Problem Statement:** If output increases, which of the following statements is correct? **Options:** A. Revenue decreases B. Revenue increases C. Price increases D. Price decreases E. Both A and D are correct **Analysis:** - **Option A:** If the price elasticity of demand is -1.0, it implies that any decrease in price leading to an increase in quantity demanded will result in total revenue remaining constant. Thus, increasing output alone, without context on price change, doesn't directly imply a decrease in revenue. - **Option B:** Revenue would remain unchanged if the price elasticity is truly unitary and price changes exactly offset the changes in quantity sold, not increasing it without specific context. - **Option C:** If output increases while demand elasticity being constant, prices might not necessarily increase. - **Option D:** Generally, if increased output corresponds with a higher supply without a change in demand, prices might indeed decrease, aligning with basic supply and demand principles. - **Option E:** If D holds true that price decreases and there's no contrary influence, A could wrongfully suggest revenue decreases without further context. However, unitary elasticity typically suggests unchanged revenue with proportional price decreases and quantity demand increases. **Conclusion:** The concept of unitary elasticity suggests a balanced effect on revenue given price and demand proportion changes, hence needing a better context. Consider underlying market dynamics beyond elasticity value in practical application.
Transcribed Image Text:**Price Elasticity of Demand Analysis** The question revolves around the concept of price elasticity of demand, which is given as -1.0. This indicates that the product has unitary elasticity, meaning the percentage change in quantity demanded is equal to the percentage change in price, but in opposite directions. **Problem Statement:** If output increases, which of the following statements is correct? **Options:** A. Revenue decreases B. Revenue increases C. Price increases D. Price decreases E. Both A and D are correct **Analysis:** - **Option A:** If the price elasticity of demand is -1.0, it implies that any decrease in price leading to an increase in quantity demanded will result in total revenue remaining constant. Thus, increasing output alone, without context on price change, doesn't directly imply a decrease in revenue. - **Option B:** Revenue would remain unchanged if the price elasticity is truly unitary and price changes exactly offset the changes in quantity sold, not increasing it without specific context. - **Option C:** If output increases while demand elasticity being constant, prices might not necessarily increase. - **Option D:** Generally, if increased output corresponds with a higher supply without a change in demand, prices might indeed decrease, aligning with basic supply and demand principles. - **Option E:** If D holds true that price decreases and there's no contrary influence, A could wrongfully suggest revenue decreases without further context. However, unitary elasticity typically suggests unchanged revenue with proportional price decreases and quantity demand increases. **Conclusion:** The concept of unitary elasticity suggests a balanced effect on revenue given price and demand proportion changes, hence needing a better context. Consider underlying market dynamics beyond elasticity value in practical application.
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