While the elasticity on straight line demand curves is
always changing, it is possible to construct demand curves where elasticity
remains constant along the curve. This graph presents three constant elasticity
demand curves with demand elasticities of -.5, -1.0 and -2.0 respectively.

Here are two problems to think about:

Problem 1: For each of the demand curves, what should
happen to total revenue when the price is reduced?

Problem 2: Consider the following statement. A particular
supplier faces a demand curve with constant elasticity of -2.0. With this
elasticity, every 1 percent cut in price will raise quantity by 2 percent
and so total revenue will increase. It follows that the supplier’s best strategy
is to cut the price as low as possible.

Assuming the supplier really does face a demand curve
with constant elasticity of -2.0, explain what is wrong with the statement’s
logic.