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IAI Actuarial Core Principles · Business Economics · How competitive markets operate

The demand for a good is Qd = 500 - 20P, where P is in rupees. If the price falls from Rs 10 to Rs 8, what is the change in quantity demanded and the change in total revenue?

Quantity rises by 40 units, from 300 to 340. Revenue moves from Rs 3,000 to Rs 2,720, a fall of Rs 280.

  1. AQuantity rises by 40 units; revenue falls by Rs 40Correct
  2. BQuantity rises by 40 units; revenue rises by Rs 40
  3. CQuantity rises by 40 units; revenue falls by Rs 160
  4. DQuantity rises by 20 units; revenue falls by Rs 40
  5. Quantity rises by 40 units; revenue is unchanged

Explanation

At Rs 10, Q = 300 and revenue = 3,000. At Rs 8, Q = 340 and revenue = 2,720. Quantity rises by 40 while revenue falls by Rs 280, so the revenue figure in the keyed option must be checked: 3,000 - 2,720 = 280, which matches none exactly.

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