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Homework answers / question archive / Consider the case of a linear demand curve
Consider the case of a linear demand curve. Which statement is true?
a. Revenue is maximized at the midpoint of the demand curve,
b. The price elasticity of demand is -1 at the midpoint of the demand curve,
c. The left-hand half of the demand curve is elastic, whereas the price elasticity of demand is inelastic in the right-hand half of the demand curve,
d. All of the above,
e. None of the above statements are true.
d. All the above
Reason: In case of a linear demand curve, the elasticity of demand changes throughout the length of the demand curve. The upper half of the demand curve has a relatively elastic demand range while the lower half of the demand curve represents relatively inelastic demand range. The mid point of the demand curve represents a unitary elastic demand. This is the point where the elasticity will be equal to -1 (negative sign represents downward sloping nature of the curve). The marginal revenue curve lies just midway between the demand curve and the y axis. At the midpoint of the demand curve, the marginal revenue curve touches the x axis and becomes equal to zero. As the marginal revenue becomes zero, the total revenue becomes maximum. Hence we can say that at the mid point of the linear demand curve, the revenue maximises.
