A rise in the price of a product lowers the total revenue from the product if the demand for the product is

A rise in the price of a product lowers the total revenue from the product if the demand for the product is

• A. demand elastic.
• B. inferior product.
• C. demand inelastic.
• D. income elasticity of demand exceeds 1.

Answer: (A)

Demand is elastic when consumers are very responsive to price changes, so a price increase causes a larger percentage drop in quantity demanded than the percentage rise in price. Since total revenue equals price × quantity, the bigger drop in quantity pulls revenue downward even though the price is higher. That’s why a rise in price lowers total revenue when demand is elastic. If demand were inelastic, revenue would rise with a higher price because quantity falls only a little; if it were unit elastic, revenue would stay about the same. The other choices relate to income effects or income elasticity, not how revenue responds to a price change.

Demand is elastic when consumers are very responsive to price changes, so a price increase causes a larger percentage drop in quantity demanded than the percentage rise in price. Since total revenue equals price × quantity, the bigger drop in quantity pulls revenue downward even though the price is higher. That’s why a rise in price lowers total revenue when demand is elastic. If demand were inelastic, revenue would rise with a higher price because quantity falls only a little; if it were unit elastic, revenue would stay about the same. The other choices relate to income effects or income elasticity, not how revenue responds to a price change.