Which of the following best describes the Total Revenue Test in microeconomics?

• A. It is a calculation of the total output produced by a firm using all available inputs.
• B. It is a test used to determine the profit-maximizing level of output for a firm.
• C. It is a measure of the additional revenue generated from selling one more unit of output.
• D. It is a method used to determine whether demand for a good is elastic or inelastic by observing how total revenue changes as price changes.

Answer: (D)

Verified step by step guidance

1. Understand that the Total Revenue Test is a method used to analyze the price elasticity of demand for a good or service.
2. Recall that Total Revenue (TR) is calculated as the product of price (P) and quantity demanded (Q), expressed as \(TR = P \times Q\).
3. Observe how Total Revenue changes when the price of the good changes: if TR moves in the opposite direction of price, demand is elastic; if TR moves in the same direction as price, demand is inelastic.
4. Use this relationship to determine elasticity without directly calculating the elasticity coefficient, by simply comparing changes in price and total revenue.
5. Conclude that the Total Revenue Test helps firms and economists understand consumer responsiveness to price changes, which is crucial for pricing and revenue strategies.