Suppose that the demand curve for a new product can be expressed as Q^D = 900 - 3P. At what price is total expenditure maximized? A) $900 B) $450 C) $300 D) $150

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Quizplus · Accepted Answer

Total expenditure (TE) is maximized where the price elasticity of demand is unitary (elasticity = -1). The demand curve is given as Q = 900 - 3P. To find the price where TE is maximized, we first find the marginal revenue (MR) by differentiating the total revenue (TR = P*Q) with respect to Q and setting MR to zero. However, a quicker approach in this case, given the linear demand curve, is to recognize that TE is maximized at the midpoint of the demand curve. The intercepts are at P = 0, Q = 900 (vertical intercept) and Q = 0, P = 300 (horizontal intercept by solving 900 - 3P = 0). The midpoint price is thus P = 300 / 2 = $150.

Suppose That the Demand Curve for a New Product Can