Economics: Private and Public Choice
16th Edition
ISBN: 9781337642224
Author: James D. Gwartney; Richard L. Stroup; Russell S. Sobel
Publisher: Cengage Learning US
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Question
Chapter 20, Problem 1CQ
To determine
The relationship between price elasticity and revenue.
Expert Solution & Answer
Explanation of Solution
The effect of an increase in tuition revenue depends on the price elasticity of demand. Suppose, the degree of responsiveness is more elastic, then an increase in tuition will result in more revenues and this will change as the type of elasticity changes. Suppose, the price elasticity of demand for the courses offered by the Nowhere State University is inelastic, then the revenue will rise. If the price elasticity of demand for the courses offered by the Nowhere State University is elastic, then revenue will fall. Here, an increase in price makes a corresponding decline in the quantity demanded. If the elasticity of demand is unitary, then the revenue remains the same. This is because the unitary elastic demand makes a proportionate change in both the price and the quantity demand. If the price elasticity of demand were 1.2, means more elastic, then an increase in tuition price will reduce the revenues.
Economics Concept Introduction
Price elasticity of demand: Price elasticity of demand refers to the degree of responsiveness of demand for a commodity, after a change in its price.
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Economics: Private and Public Choice
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