1. the elasticity of demand must be greater than unity.
2. the elasticity of demand must be less than unity.
3. the elasticity of demand may be greater or less than unity.
Choose the option that yields the correct answer.
Option 2 is the correct one. If total revenue is declining as output increases the percentage fall in price must be greater than the percentage increase in quantity.
From the definition of elasticity
Φ = ( ΔQ / Q ) / ( ΔP / P )
it follows that Φ must be > -1 and less than unity in absolute value.