Inelastic demand implies what happens to total revenue when price increases?

Inelastic demand implies what happens to total revenue when price increases?

• A. Total revenue decreases.
• B. Total revenue increases.
• C. Total revenue remains constant.
• D. It depends on income elasticity.

Answer: (B)

With inelastic demand, the quantity you buy changes little when the price changes. Since total revenue is price times quantity, a higher price will raise revenue as long as the drop in quantity is small. Inelastic demand means the percentage drop in quantity is less than the percentage rise in price, so revenue moves in the same direction as the price. For example, a 10% price hike with only a small, smaller percentage drop in quantity leaves total revenue higher. This tends to happen with essential goods or those with few substitutes. Income elasticity isn’t the factor here; it measures how quantity responds to income, not to price. If demand were elastic, revenue would fall after a price increase; if unit elastic, revenue would stay the same.

With inelastic demand, the quantity you buy changes little when the price changes. Since total revenue is price times quantity, a higher price will raise revenue as long as the drop in quantity is small. Inelastic demand means the percentage drop in quantity is less than the percentage rise in price, so revenue moves in the same direction as the price. For example, a 10% price hike with only a small, smaller percentage drop in quantity leaves total revenue higher. This tends to happen with essential goods or those with few substitutes.

Income elasticity isn’t the factor here; it measures how quantity responds to income, not to price. If demand were elastic, revenue would fall after a price increase; if unit elastic, revenue would stay the same.