How would the following changes in price affect total revenue? That is, would total revenue increase, decline, or emain unchanged? [Marks: 06] a. Price falls and demand is inelastic. b. Price rises and demand is elastic. c. Price rises and demand is inelastic. d. Price falls and demand is elastic. e. Price falls and demand is of unit elasticity. 

a.      Total revenue would decline

Demand is said to be inelastic when elasticity of demand is less than 1 in absolute terms. This means that the percentage change in quantity demanded is less than the percentage change in price. Because of this, a price fall will not significantly increase quantity demanded and therefore, a decline in total revenue.

b.     Total revenue would decline

When demand is elastic, then a small change in price causes a significant change in quantity demanded. In this case, elasticity of demand is greater than 1 in absolute terms. With a slight increase in price therefore, quantity demanded significantly decreases causing a decline in total revenue.

c.      Total revenue would increase

With an inelastic demand, a change in price do not significantly affect quantity demanded because consumers are less sensitive to price changes. Because of this, an increase in price do not in a large extend affect quantity demanded and therefore, an increase in total revenue.

d.     Total revenue would increase

With an elastic demand, consumers are highly sensitive to any slight change in price. A price fall would therefore significantly increase quantity demanded and this would result to an increase in total revenue.

e.     Total revenue would remain unchanged

When demand is unitary, then the percentage change in quantity demanded equals to the percentage change in price. When the price falls therefore, quantity demanded increase by the same magnitude causing no effect on the total revenue.