Elasticities Of Demand And Supply Practice Test

If the price elasticity of demand equals 1, as its price rises, total revenue will

total revenue increases. quantity demanded does not change. total revenue does not change. quantity demanded increases.

Correct Answer:

total revenue does not change.

Explanation:

Unit elastic demand means the percentage change in quantity demanded exactly offsets the percentage change in price. With elasticities around -1, raising the price tends to cut the quantity sold by a similar percentage, so the product P × Q (total revenue) stays basically the same. Mathematically, if Ed = (%ΔQ)/(%ΔP) = -1, then %ΔQ = -%ΔP. Since total revenue is TR = P × Q, the approximate change in TR for a small price move is %ΔTR ≈ %ΔP + %ΔQ = %ΔP + (-%ΔP) = 0. So total revenue does not change for small price changes. That’s why the best answer is that total revenue does not change. Quantity demanded does change when price changes, but the revenue impact cancels out under unit elasticity.

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