Elastic Demand Implies Revenue Rises with Price Cuts

Steps:

• Calculate absolute elasticity: between 1 and 1.3, indicating elastic demand (|E| > 1).
• Recall revenue rule: for elastic demand, lowering price boosts quantity demanded more than proportionally.
• Apply to total revenue (TR = P × Q): percentage ΔQ > percentage ΔP, so TR increases.
• Match to options: reducing prices aligns with revenue growth.

Why D is correct:

• In elastic demand (|E| > 1), TR rises when price falls, per the formula TR change = P(1 + 1/E)ΔP, where 1/E < 1 yields positive TR effect for ΔP < 0.

Why the others are wrong:

• A: Price hikes in elastic demand cut TR, likely reducing profit.
• B: Elasticity provides no insight into production costs or output scaling.
• C: Research ignores advertising's role in costs or demand.

Final answer: D