University of Central Florida (UCF) ECO2023 Principles of Microeconomics Final Practice Exam

When total revenue decreases as a result of a price change, it indicates that the demand for the product is inelastic. This means that consumers are not very responsive to changes in price; a decrease in price does not lead to a proportionate increase in the quantity demanded, resulting in lower total revenue.

In the case of inelastic demand, a price decrease leads to a less than proportionate increase in quantity demanded, which ultimately reduces total revenue. Conversely, if demand were elastic, a price decrease would lead to a more than proportionate increase in quantity demanded, thus increasing total revenue.

The concept of perfectly inelastic demand pertains to a scenario where the quantity demanded remains constant regardless of price changes, which would result in total revenue staying the same even if the price changes. Unit elastic demand, on the other hand, implies that changes in price do not affect total revenue at all. Therefore, in the context of total revenue decreasing from a price change, the scenario strongly suggests that demand is inelastic.