Question

Refer to the figure. If the firm wants to maximize revenue, it will set price: • Somewhere in the elastic range of the demand curve (e > 1). • Somewhere in the inelastic range of the demand curve (e < 1). • Where price elasticity of demand equals one (e = 1). • Where price is maximum.

THE DIAGRAM IS THE UNITERATY ,ELASTIC, NO ELASTIC. DIAGRAM.

Answer 1

Answer

If the firm wants to maximize revenue, it will set price:

Option c) is correct. Where price elasticity of demand equals one (e = 1).

Reason:

The first thing to note is that revenue is maximized at the point where elasticity is unit elastic.

If elastic: The quantity effect outweighs the price effect, meaning if we decrease prices, the revenue gained from the more units sold will outweigh the revenue lost from the decrease in price.

If inelastic: The price effect outweighs the quantity effect, meaning if we increase prices, the revenue gained from the higher price will outweigh the revenue lost from less units sold.