CA Foundation · Business Economics · Theory of Demand and Supply
A cinema multiplex in Hyderabad cuts its ticket price from ₹250 to ₹200 and finds that its total revenue from ticket sales rises. Which conclusion about the demand for its tickets over this price range is correct?
Demand is elastic. When a price cut increases total revenue, the percentage increase in quantity demanded must be larger than the percentage fall in price, which means the absolute price elasticity exceeds one. With inelastic or unitary demand, a price cut would lower or leave revenue unchanged.
- ADemand is inelastic, with elasticity less than one
- BDemand is elastic, with elasticity greater than oneCorrect
- CDemand is perfectly inelastic
- DDemand has unitary elasticity
Explanation
Under the total outlay method, when a price fall raises total revenue, the percentage rise in quantity exceeds the percentage fall in price. This means elasticity is greater than one. If demand were inelastic or unitary, revenue would fall or stay unchanged respectively after a price cut.
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