How to Use the Total Revenue Test to Predict Revenue Changes with PED

📚 Quick Study Guide

• 📈 Total Revenue (TR): The total income a business receives from selling its goods or services. Calculated as Price (P) × Quantity (Q).
• 🎯 Price Elasticity of Demand (PED): Measures the responsiveness of the quantity demanded of a good or service to a change in its price.
• 📐 Formula for PED: $PED = \frac{\% \ Change \ in \ Quantity \ Demanded}{\% \ Change \ in \ Price}$
• 💡 Total Revenue Test: A method to determine the elasticity of demand by examining how total revenue changes when price changes.
• Elastic Demand: |PED| > 1. If price increases, TR decreases. If price decreases, TR increases.
• Unit Elastic Demand: |PED| = 1. Changes in price do not affect TR.
• Inelastic Demand: |PED| < 1. If price increases, TR increases. If price decreases, TR decreases.

Practice Quiz

1. Which of the following best describes the Total Revenue Test?

   1. A) A method to calculate the exact PED coefficient.
   2. B) A method to estimate PED by observing changes in total revenue when price changes.
   3. C) A method to determine the costs of production.
   4. D) A method to calculate profit margins.

2. If demand is elastic and a firm increases its price, what happens to total revenue?

   1. A) Total revenue increases.
   2. B) Total revenue decreases.
   3. C) Total revenue remains constant.
   4. D) Total revenue initially increases, then decreases.

3. If demand is inelastic and a firm decreases its price, what happens to total revenue?

   1. A) Total revenue increases.
   2. B) Total revenue decreases.
   3. C) Total revenue remains constant.
   4. D) Total revenue initially decreases, then increases.

4. If the price of a product increases by 10% and the quantity demanded decreases by 5%, is demand elastic, inelastic, or unit elastic?

   1. A) Elastic
   2. B) Inelastic
   3. C) Unit Elastic
   4. D) Perfectly Elastic

5. If a change in price does not affect total revenue, what type of elasticity is present?

   1. A) Elastic
   2. B) Inelastic
   3. C) Unit Elastic
   4. D) Perfectly Inelastic

6. Which of the following is the correct formula for calculating Price Elasticity of Demand (PED)?

   1. A) $PED = \frac{\% \ Change \ in \ Price}{\% \ Change \ in \ Quantity \ Demanded}$
   2. B) $PED = \frac{\% \ Change \ in \ Quantity \ Demanded}{\% \ Change \ in \ Price}$
   3. C) $PED = \frac{Change \ in \ Quantity \ Demanded}{Change \ in \ Price}$
   4. D) $PED = \frac{Change \ in \ Price}{Change \ in \ Quantity \ Demanded}$

7. Suppose a movie theater increases its ticket price from $10 to $12. As a result, attendance drops from 200 to 150 people. What happens to the total revenue?

   1. A) Total revenue increases.
   2. B) Total revenue decreases.
   3. C) Total revenue remains constant.
   4. D) There is not enough information to determine.