Complete the following sentence. Given that total revenue = price x quantity, a reduction in price will lead to an increase in total revenue when demand is

a. unit elastic

b. inelastic

c. elastic

Elastic.

This is the formula for elasticity:

Elasticity = (Quantity variation/Quantity) / (Price variation/Price)

Inelastic demand is the one in which a variation in price doesn’t lead to an important variation in the quantity bought by consumers. So, in the formula, numerator is much smaller than denominator, so the fraction is lower than 1. That happens with necessary goods (typically, food).

On the contrary, elastic demand is the one in which a variation in the price leads to an important variation in the quantity bought by consumers, and that means the fraction is higher than 1. So if I sell the product at a lower price, I will sell much more product.

Considering the formula: R = P*Q, when demand is elastic, I will have much more sold quantity with just a little lower price, which leads to a higher revenue.