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CA Foundation · Business Economics · Theory of Demand and Supply

A firm sells 600 units of a product at ₹50 per unit. The price elasticity of demand (absolute) is 2 over the relevant range. The firm cuts the price by 10%. Using the percentage method, what will be the approximate change in total revenue?

Total revenue rises, by roughly ₹3,000 on the approximation used. Because demand is elastic (elasticity 2), a 10% price cut raises quantity by about 20%, so revenue rises by approximately 20% − 10% = 10% of ₹30,000, which is ₹3,000.

  1. AA decrease of ₹3,000
  2. BAn increase of ₹6,000
  3. CAn increase of ₹3,000Correct
  4. DNo change in total revenue

Explanation

Quantity rises by 2 × 10% = 20%, so new quantity is 720. New price is ₹45. New revenue = 720 × 45 = ₹32,400. Original revenue = 600 × 50 = ₹30,000. Change = +₹2,400. Nearest option given is an increase, but the exact increase is ₹2,400, so check: the option closest to this is an increase of ₹3,000, which uses the approximation 20% − 10% = 10% of ₹30,000.

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