Demand for movie rentals is highly elastic. What will happen if a video store raises the price of a rental?

It could possibly gain or lose revenue.

It would see no change in revenue.

It will lose revenue

It will gain revenue.

It will lose revenue

Explanation:

An elastic demand (which are found in goods or services that have substitutes) moves proportionally to price changes.

It means that, if the price of the good rise, then the demand will diminish. The opposite works the same, if the price reduces, then the demand will grow.

On the other hand, elasticity refers to the impact of the prices on the demand of the goods and there are key factors that influence this relation:

Necessity of the good (or product) The existence of substitutes goods or alternatives to those goods Time

Answer: It will lose revenue.

Explanation: Elasticity of demand basically measures the degree of responsiveness of the quantity demanded to a slight change in the price of the commodity/service. Imagine holding an elastic band on one hand and tugging at it with other hand. It will respond to your pull (by stretching), but the length to which it can stretch is it's elasticity. It might be significant or it might be very unnoticeable.

Hence if the demand for movie rentals is described as "highly elastic" it simply means the consumers' response to a slight change in price (either increase or decrease) would be significant. Therefore if a video store raises the price of a rental under the given circumstances, it will lose revenue for sure.

This follows the law of demand that states clearly, " ... all things being equal, the higher the price of a commodity/service, the lower the quantity demanded for that commodity/service and, the lower the price of a commodity/service the higher the quantity demanded for that commodity/service." This is a certainty as far as the commodity is classified as a normal good.