question archive If the demand elasticity is more than 1 in absolute value and the supply decreases, which of the following statements is true? A
If the demand elasticity is more than 1 in absolute value and the supply decreases, which of the following statements is true? A
Subject:EconomicsPrice:2.88 Bought3
If the demand elasticity is more than 1 in absolute value and the supply decreases, which of the following statements is true?
A. Revenue for the firm increases.
B. Revenue for the firm decreases.
C. Revenue for the firm remains unchanged.
D. Revenue for the firm increases by 25%.
E. We need more information to determine what happens to revenues.
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The correct answer is: B. Revenue for the firm decreases.
A decrease in supply means that the supply curve will shift to the left, and the equilibrium price will rise. Given that the demand is elastic, the increase in price will reduce the firm's revenue.
When the demand is elastic, total revenue changes in the opposite direction of a change in price, and when the demand is inelastic, the change in the total revenue moves in the same direction of change in price.
