Suppose that an SUV dealer cut her prices by 20 She then fin

Suppose that an SUV dealer cut her prices by 20%. She then finds that her SUV sales revenues have increased by 1 596, what can you say about the price elasticity of demand for SUVs? JSelect one: o a. it is elastic 0 bit is inelastic O c. it is unit elastic O d. not enough information to answer the question

Solution

Correct option is (b).

Price elasticity of demand = % Change in quantity demanded / % Change in price

Demand is inelastic when a N% decrease (increase) in price will increase (decrease) quantity demanded by less than N%, therefore total revenue will increase. In this case, a fall in price has led to a rise in total revenue, so demand is inelastic.