When demand is unit elastic, a price change leads to an approximately proportional opposite change in quantity demanded, causing total revenue to

When demand is unit elastic, a price change leads to an approximately proportional opposite change in quantity demanded, causing total revenue to

• A. Rise
• B. Remain unchanged
• C. Fall
• D. Be unpredictable

Answer: (B)

Unit elastic demand means the price elasticity of demand is exactly one, so the percentage change in quantity demanded is equal in magnitude but opposite in direction to the percentage change in price. Because total revenue is price times quantity, the percentage changes in price and quantity offset each other when elasticity is one, leaving revenue essentially unchanged after a price move. For example, a 10% price increase is met with about a 10% drop in quantity demanded, so revenue stays the same; conversely, a 10% price decrease is met with about a 10% rise in quantity, also keeping revenue unchanged.

Unit elastic demand means the price elasticity of demand is exactly one, so the percentage change in quantity demanded is equal in magnitude but opposite in direction to the percentage change in price. Because total revenue is price times quantity, the percentage changes in price and quantity offset each other when elasticity is one, leaving revenue essentially unchanged after a price move. For example, a 10% price increase is met with about a 10% drop in quantity demanded, so revenue stays the same; conversely, a 10% price decrease is met with about a 10% rise in quantity, also keeping revenue unchanged.