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JAMB Economics 2015 Question 18

Question 18

Elasticity

The elasticity of demand for a firm's product is 2. If the firm reduces its price by 20 percent, its sales revenue will increase by

  1. A.10 percent
  2. B.20 percent
  3. C.30 percent
  4. D.40 percent.
Show the answer and explanation

Answer: B (20 percent)

Explanation

With elasticity 2, a 20% price cut raises quantity by 2 × 20% = 40%. Revenue change ≈ % change in quantity + % change in price = 40% − 20% = 20%.