When a 2 percent increase in the price of automobiles generates a greater than 2 percent decrease in quantity demanded, then
A) price elasticity of demand for automobiles is less than one
B) total revenue increases
C) demand is price inelastic
D) demand is unit elastic
E) total revenue decreases

Question

Quizplus · Accepted Answer

When a price increase leads to a greater percentage decrease in quantity demanded, it indicates that the demand is price elastic (meaning consumers are highly responsive to price changes). In this scenario, because the decrease in quantity demanded is greater than the increase in price, total revenue (price x quantity) decreases. Elasticity greater than 1 indicates price elasticity of demand, contrary to options A and C which suggest inelastic demand or unit elasticity (D). Total revenue does not necessarily increase as suggested in B, especially when demand is elastic.

When a 2 Percent Increase in the Price of Automobiles