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CMA Foundation · Fundamentals of Business Economics and Management · Theory of Demand and Supply

A mobile recharge provider in Pune finds that a 10% rise in price lowers quantity demanded by 4%. Total revenue will therefore:

Total revenue will rise because demand is inelastic. Elasticity is 4 divided by 10, which is 0.4, below one. The price increase of 10 per cent outweighs the 4 per cent fall in quantity, so price times quantity increases.

  1. AFall, because demand is elastic
  2. BRise, because demand is inelasticCorrect
  3. CRemain unchanged, because demand is unitary elastic
  4. DFall, because demand is perfectly elastic

Explanation

Elasticity = 4/10 = 0.4, which is less than 1, so demand is inelastic. When demand is inelastic, the percentage rise in price exceeds the percentage fall in quantity, so total revenue rises. The option citing elastic demand is wrong because elasticity here is below one.

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