Along a linear demand curve, total revenue is maximized A

Economics Dec 13, 2020

Along a linear demand curve, total revenue is maximized

A. where the slope of a line from the origin to the demand curve is equal to the elasticity.

B. where the elasticity is -1.

C. near the quantity axis intercept.

D. near the price axis intercept.

E. where the elasticity is 0.

Expert Solution

Answer: B

Total revenue is maximized on a linear demand curve where elasticity is -1 for two reasons:

On a linear demand curve, there is only one point where price elasticity of demand is -1
When price elasticity of demand is -1, the % rate of change in price equals the % rate of change is quantity. Thus is it is a local maximum for revenue

Thus, if we know what the point where elasticity of demand is -1 is a local maximum for total revenue but it only occurs once on a linear demand curve, we know that it is a global maximum too.

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