Question

When demand is inelastic, the ________________ is greater than the _______________ effect so that a decrease in price _______________ total revenue. The Ed here is _______________.

a) Substitution, income, increases
b) Substitution, income, decreases
c) Income, substitution, increases
d) Income, substitution, decreases

Answer 1

When demand is inelastic, the Income is greater than the substitution effect so that a decrease in price decreases total revenue. The Ed here is Income, substitution, decreases.

The answer is option ⇒D

Step-by-step explanation:

When demand is inelastic, a decrease in price does not always increase total revenue. Inelastic demand means that the quantity demanded is not very responsive to changes in price. The substitution effect and the income effect both play a role in determining the impact on total revenue.

• 1. Substitution effect: When the price of a good decreases, it becomes relatively cheaper compared to its substitutes. This encourages consumers to switch from substitutes and increase their demand for the good. If the substitution effect is stronger than the income effect, a decrease in price can lead to an increase in total revenue.

• 2. Income effect: A decrease in price can also increase consumers' purchasing power, as they can buy the same quantity of the good for less money. This may lead to an increase in demand if the income effect is stronger than the substitution effect

The answer is option ⇒D