If the price of snow peas falls from $4.00 to $3.00 a bushel, total revenue will:

• A. increase because demand is elastic in this range.
• B. increase because demand is inelastic in this range.
• C. decrease because demand is inelastic in this range.
• D. decrease because demand is elastic in this range.

Answer: (C)

The main concept is how total revenue responds to a price change depending on the price elasticity of demand. When the price falls from $4 to $3, the price drops by 25%. Total revenue equals price times quantity, so we consider how buyers’ quantity demanded changes. If demand is inelastic in this range, the quantity demanded rises, but by a smaller percentage than the 25% price fall. The smaller increase in quantity isn’t enough to offset the lower price, so total revenue falls. That’s why the correct reasoning is that revenue decreases because demand is inelastic in this range. If demand were elastic, the larger rise in quantity would offset the price drop and revenue would rise; if unit elastic, revenue would stay the same.