The total revenue effect of a movement along a demand curve can best be predicted using the
A)Law of diminishing marginal utility.
B)Price elasticity of demand.
C)Utility-maximizing rule.
D)Law of demand.

Question

Quizplus · Accepted Answer

The price elasticity of demand measures the responsiveness of the quantity demanded to changes in the price of a good. By knowing the price elasticity of demand, we can predict the direction and magnitude of the revenue effect of a movement along the demand curve. If demand is elastic (i.e. the price elasticity of demand is greater than 1), then a decrease in price leads to a proportionally larger increase in quantity demanded, resulting in an increase in revenue. However, if demand is inelastic (i.e. the price elasticity of demand is less than 1), then a decrease in price leads to a proportionally smaller increase in quantity demanded, resulting in a decrease in revenue.

The Total Revenue Effect of a Movement Along a Demand