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JAMB Economics 2001 Question 1

Question 1

Elasticity

If the price elasticity of demand for a good is 0.43, an increase in the price of the good will result in

  1. A.an increase in profit by 43%
  2. B.a net gain
  3. C.a decrease in profit by 43%
  4. D.a net loss
Show the answer and explanation

Answer: B (a net gain)

Explanation

An elasticity of 0.43 is less than 1, so demand is inelastic. Raising the price cuts quantity by a smaller proportion, so total revenue rises: a net gain.