1. For each case, choose the condition that characterizes demand: elastic demand, inelastic demand, or unit-elastic demand.
Total revenue decreases when price increases.
Elastic demand. Consumers are highly responsive to changes in price. For a rise in price, the quantity effect (which tends to reduce total revenue) outweighs the price effect (which tends to increase total revenue). Overall, this leads to a fall in total revenue.
The additional revenue generated by an increase in quantity sold is exactly offset by revenue lost from the fall in price received per unit.
Unit-elastic demand. Here the revenue lost to the fall in price is exactly equal to the revenue gained from higher sales. The quantity effect exactly offsets the price effect.
Total revenue falls when output increases.
Inelastic demand. Consumers are relatively unresponsive to changes in price. For consumers to purchase a given percent increase in output, the price must fall by an even greater percent. The price effect of a fall in price (which tends to reduce total revenue) outweighs the quantity effect (which tends to increase total revenue). As a result, total revenue decreases.
Producers in an industry find they can increase their total revenues by coordinating a reduction in industry output.
Inelastic demand. Consumers are relatively unresponsive to price, so the percent fall in output is smaller than the percent rise in price. The price effect of a rise in price (which tends to increase total revenue) outweighs the quantity effect (which tends to reduce total revenue). As a result, total revenue increases.