Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 6: Problem 28

A firm seeking to maximize its total revenue would lower its price until price elasticity of demand was (LO3) a) a maximum b) a minimum c) one

Short Answer

Expert verified
The correct answer to maximize total revenue by lowering the price until price elasticity of demand reaches a specific value is c) one, which represents unitary price elasticity.

Step by step solution

01

Understanding Total Revenue, Price, and Price Elasticity of Demand

Total revenue is the product of the price and the quantity of goods sold. Price elasticity of demand measures the responsiveness of the quantity demanded of goods to a change in its price. It is defined as the percentage change in quantity demanded divided by the percentage change in price.
02

Formula for Price Elasticity of Demand

The formula for price elasticity of demand (E) is: \[E = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}\] A negative value of E represents the law of demand, which states that as the price of a good increases, the quantity demanded decreases.
03

Total Revenue and Price Elasticity of Demand Relationship

Total Revenue (TR) is calculated by multiplying the price (P) by quantity demanded (Q): \[TR = P \cdot Q\] To maximize total revenue, the firm must find a balance between the price and quantity demanded that result in the highest possible total revenue. This balance occurs when the price elasticity of demand is equal to one (E = 1).
04

Analyzing Options and Answering the Question

Let's analyze the given options to determine the correct answer: a) A maximum - Price elasticity of demand doesn't have a maximum value, making this option incorrect. b) A minimum - Price elasticity of demand doesn't have a minimum value, making this option also incorrect. c) One - As mentioned previously, maximizing total revenue occurs when the price elasticity of demand is equal to one (E = 1). This condition is known as unitary price elasticity. Hence, the correct answer is: c) one

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Which statement is the most accurate? (LO7, 5) a) The demand for gasoline is very elastic. b) The demand for home heating oil is very inelastic. c) The seller of a perishable commodity has a relatively elastic supply. d) Most firms can double their output in the short run.

Demand is elastic when (LO1) a) percentage change in price is greater than percentage change in quantity b) percentage change in quantity is greater than percentage change in price c) the demand curve is vertical d) price increases raise total revenue

If our income elasticity for vacation trips is \(2.8\), we may conclude that vacation trips are (LO1) a) a normal service b) an inferior service c) both a normal service and an inferior service d) neither a normal service nor an inferior service

If demand is elastic and price is lowered, total revenue will (LO3) a) rise b) fall c) stay the same d) possibly rise or possibly fall

A tax will (LO7) a) lower price and raise supply b) lower price and lower supply c) raise price and lower supply d) raise price and raise supply
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free