The price effect is greater than the output effect when which of the following is true?

• A. Total revenue increases due to monopolists raising prices
• B. Total revenue decreases due to monopolists raising prices
• C. Total revenue remains constant despite price changes
• D. Total revenue always decreases with price changes

Answer: (A)

When a monopolist raises price, the overall effect on total revenue depends on how responsive buyers are to price changes. The price effect is the extra revenue earned from charging more per unit, while the output effect is the revenue loss from selling fewer units. If demand is inelastic at the current quantity, the percentage increase in price is larger than the percentage drop in quantity, so total revenue rises—the price effect dominates the output effect.

Monopolists can raise prices because they face a downward-sloping demand curve, but they will only see higher total revenue when the demand is not very responsive to price changes. This is why total revenue increasing with a price rise signals the price effect outweighing the output effect. If demand were elastic, the loss in units would outweigh the higher price and total revenue would fall; if demand were unit elastic, total revenue would stay the same.