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CSEET · Economic and Business Environment · Basics of Demand and Supply and Forms of Market Competition

A cinema raises its ticket price and finds that its total revenue falls. What can be concluded about the demand for its tickets over this price range?

Demand is elastic. If a price increase lowers total revenue, the proportionate fall in quantity sold must be larger than the proportionate rise in price, meaning elasticity exceeds one. With inelastic demand, revenue would rise after a price increase, and with unitary elasticity it would stay unchanged.

  1. ADemand is inelastic
  2. BDemand is elasticCorrect
  3. CDemand is unitary elastic
  4. DDemand is perfectly inelastic

Explanation

When price rises and total revenue falls, the percentage fall in quantity exceeds the percentage rise in price, so elasticity is greater than 1. Inelastic demand would instead show revenue rising with price. Unitary elasticity would leave revenue unchanged.

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