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.

Question

Quizplus · Accepted Answer

The price elasticity of demand measures the responsiveness of quantity demanded to a change in price. 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. price elasticity of demand is greater than 1), then a price increase will lead to a decrease in total revenue, while a price decrease will lead to an increase in total revenue. If demand is inelastic (i.e. price elasticity of demand is less than 1), then a price increase will lead to an increase in total revenue, while a price decrease will lead to a decrease in total revenue. If demand is unit elastic (i.e. price elasticity of demand is exactly 1), then a price change will not affect total revenue.

The Total Revenue Effect of a Movement Along a Demand