Maximum total revenue occurs when
A) Total revenue is -1.0.
B) The absolute value of the price elasticity of demand is 1.0.
C) Price multiplied by quantity is 1.0.
D) The absolute value of the price elasticity of demand is 100.

Question

Quizplus · Accepted Answer

The maximum total revenue occurs when the price elasticity of demand is -1.0 (the absolute value is 1.0). This means that a 1% increase in price results in a 1% decrease in quantity demanded, which keeps the total revenue the same. In other words, the increase in price is offset by the decrease in quantity, resulting in no change in total revenue. If the price elasticity of demand is less than -1.0 (absolute value greater than 1.0), then a small increase in price results in a large decrease in quantity demanded, causing a decrease in total revenue. If the price elasticity of demand is greater than -1.0 (absolute value less than 1.0), then a small increase in price results in a small decrease in quantity demanded, causing a decrease in total revenue. Therefore, B is the best choice.

Maximum Total Revenue Occurs When