Demand is along the upper half of a linear demand curve, so an increase in quantity from a decrease in price increases total revenue. Demand is along the lower half of a linear demand curve, so an increase in quantity from a decrease in price decreases total revenue. Total revenue is maximized at the midpoint of a linear demand curve, where demand is unit elastic.
The correct answer and explanation is :
The correct answer is that total revenue is maximized at the midpoint of a linear demand curve, where demand is unit elastic.
Explanation:
In economics, total revenue (TR) is the total amount of money a firm receives from selling a certain quantity of a good, calculated as the price (P) times the quantity (Q):
[
TR = P \times Q
]
The relationship between price and quantity demanded can be shown by the demand curve. The demand curve can be divided into two segments: the upper half and the lower half.
- Upper Half of the Demand Curve:
- When the demand curve is in the upper half, it means the price is relatively high, and the quantity demanded is low.
- In this region, demand is elastic, meaning that a decrease in price will lead to a proportionally larger increase in the quantity demanded. This results in an increase in total revenue because the increase in quantity more than offsets the decrease in price.
- Lower Half of the Demand Curve:
- In the lower half, the price is relatively low, and the quantity demanded is high.
- In this region, demand becomes inelastic, meaning that a decrease in price results in a proportionally smaller increase in quantity demanded. Here, total revenue decreases because the price decrease does not generate enough of an increase in quantity to offset the loss in revenue from the price drop.
- The Midpoint of the Demand Curve:
- The midpoint of the linear demand curve represents the point where demand is unit elastic. This means that any change in price leads to an exactly proportional change in quantity demanded. At this point, total revenue is maximized because the percentage change in price is equal to the percentage change in quantity demanded, so the price and quantity changes offset each other in a way that maximizes total revenue.
Thus, total revenue is highest at the midpoint of a linear demand curve, where the price elasticity of demand is unitary (elasticity equals 1).