Multiple Choice
Which of the following statements about the price elasticity of demand on a demand curve is false?
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4. Elasticity
Price Elasticity of Demand on a Graph
Multiple Choice
When demand is elastic and marginal revenue is positive, total revenue must be:
A
at its maximum
B
increasing as price decreases
C
decreasing as price decreases
D
constant regardless of price changes
Verified step by step guidance1
Recall the relationship between price elasticity of demand (E_d) and marginal revenue (MR). When demand is elastic, the absolute value of E_d is greater than 1, meaning consumers are sensitive to price changes.
Understand that marginal revenue is related to elasticity by the formula: \(MR = P \left(1 + \frac{1}{E_d}\right)\), where \(P\) is price and \(E_d\) is the price elasticity of demand (note that \(E_d\) is negative for a downward sloping demand curve).
Since demand is elastic (\(|E_d| > 1\)), the term \(\frac{1}{E_d}\) is a negative fraction with absolute value less than 1, making \(MR\) positive. This means that selling one more unit adds to total revenue.
When marginal revenue is positive, total revenue is increasing as quantity increases. Because price and quantity move inversely along the demand curve, a decrease in price leads to an increase in quantity demanded, causing total revenue to increase.
Therefore, when demand is elastic and marginal revenue is positive, total revenue must be increasing as price decreases.
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