Unit Elastic Demand Maintains Total Revenue

Steps:

• Price elasticity of demand (PED) measures the percentage change in quantity demanded divided by the percentage change in price.
• Total revenue (TR) equals price (P) times quantity (Q); a price reduction affects TR based on how quantity responds.
• If TR stays the same after a price drop, the percentage increase in quantity exactly offsets the percentage decrease in price.
• Thus, PED equals 1, indicating unit elasticity.

Why D is correct:

• PED = 1 (unit elastic) means the percentage change in quantity demanded equals the percentage change in price in opposite direction, keeping TR constant per the TR-PED relationship.

Why the others are wrong:

• A. Zero: PED = 0 (perfectly inelastic) means quantity doesn't change, so TR falls with a price reduction.
• B. Between 0 and 1: Inelastic demand causes quantity to increase by less than the price decrease, raising TR.
• C. Greater than 1: Elastic demand causes quantity to increase more than the price decrease, raising TR.

Final answer: D