Explanation

(a)) Demand is elastic if a change in the price of a commodity results in a more than proportionate change in quantity demanded. On the other hand, demand is inelastic if a change in the price of a commodity results in a less than proportionate change in quantity demanded.

ii. Income elasticity of demand refers to the degree of responsiveness of quantity demanded of a commodity to a change in the income of the consumer. Cross elasticity of demand on the other hand is the degree of responsiveness of quantity demanded of one commodity to a change in the price of another commodity.

(b) i. If the demand is elastic, an increase in price will result in a more than proportionate fall in the quantity demanded. By this, the producer's revenue will fall. As shown in the diagram below, the quantity demanded falls from 0Q\(_{1}\) to 0Q\(_{2}\) after the price increased from 0P\(_{1}\) to 0P\(_{2}\).

TR\(^{2}\) before the price increased in the area of rectangle 0P\(_{2}\)NQ\(_{2}\).

Clearly, 0Q\(_{1}\) MP\(_{1}\) > 0Q\(_{2}\)NP0Q\(_{2}\). i.e, TR\(^{1}\) > TR\(^{2}\)

(i) If the demand is inelastic, an increase in price will result in a less than proportionate fall in quantity demanded. By this, the producer's total revenue will rise. As shown in the diagram below, quantity demanded falls from 0Q\(_{1}\) to 0Q\(_{2}\) after a price increase from 0P\(_{1}\) to 0P\(_{2}\).

TR before the price increase is the area of rectangle 0P\(_{2}\) SQ\(_{2}\). TR after the price increase is the area of rectangle 0P\(_{2}\) SQ\(_{2}\).

Clearly, 0P\(_{1}\),TQ\(_{1}\) < 0P\(_{2}\) SQ\(_{2}\). i.e. TR\(_{1}\) < TR\(_{2}\).

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