# A rise in the price of a product whose demand is elastic will reduce the total revenue of the firm. Explain.

### Microeconomics: Principles & Policy

14th Edition
William J. Baumol + 2 others
Publisher: Cengage Learning
ISBN: 9781337794992

Chapter
Section

### Microeconomics: Principles & Policy

14th Edition
William J. Baumol + 2 others
Publisher: Cengage Learning
ISBN: 9781337794992
Chapter 6, Problem 4DQ
Textbook Problem
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## A rise in the price of a product whose demand is elastic will reduce the total revenue of the firm. Explain.

To determine

The effect of a price rise on revenue of the firm with an elastic demand.

### Explanation of Solution

A product with elastic demand means the percentage change in the quantity demanded is higher than the percentage change in price.

If the price is increased insignificantly, the quantity demanded would fall significantly. Thus, the total revenue will decrease. Conversely, if the price is decreased insignificantly, the quantity demanded would increase significantly. Thus, the total revenue will increase.

The following graph shows an elastic demand curve, which is flatter:

When the price of good X increases from P1 to P2, then the quantity demanded would fall from Q1 to Q2. This fall in quantity demand is relatively more than the fall of price when the demand is elastic.

In the given diagram, (q1-q2) > (p1-p2).

Let a firm produces 100 unit of good x at $10 per unit price and earn a revenue equal to$1000 (100*\$10)...

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