What is the total revenue test for elasticity?

• A. A method that infers demand elasticity by observing how total revenue changes after a price change: if TR moves opposite to price it's elastic, if TR moves with price it's inelastic, and if TR is unchanged it's unit elastic.
• B. A method that calculates elasticity by comparing percentage changes in quantity demanded to percentage changes in price using the percentage change formula.
• C. A method that determines elasticity by checking the sign of marginal revenue: positive MR implies elastic demand, negative MR implies inelastic demand, and zero MR implies unit elasticity.
• D. A method that estimates elasticity by measuring the slope of the demand curve (change in price divided by change in quantity) rather than by revenue changes.

Answer: (A)

Verified step by step guidance

1. Understand that the total revenue test is a way to determine the price elasticity of demand by looking at how total revenue (TR) changes when the price changes.
2. Recall that total revenue is calculated as \(TR = P \times Q\), where \(P\) is price and \(Q\) is quantity demanded.
3. Observe what happens to total revenue when the price changes: if total revenue moves in the opposite direction of the price change (for example, price goes up and total revenue goes down), demand is elastic.
4. If total revenue moves in the same direction as the price change (both increase or both decrease), demand is inelastic.
5. If total revenue remains unchanged when the price changes, demand is unit elastic.