Given a downward-sloping demand curve for Barry's product, at which price point will Barry's maximize total revenue?

• A. At the highest possible price Barry can charge
• B. At the lowest possible price Barry can charge
• C. At the price where demand is unit elastic (elasticity equals 1)
• D. At the price where marginal cost equals marginal revenue

Answer: (C)

Verified step by step guidance

1. Understand that total revenue (TR) is calculated as price (P) multiplied by quantity demanded (Q), so \(TR = P \times Q\).
2. Recall that the price elasticity of demand measures how quantity demanded responds to a change in price, and is defined as \(E_d = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}\).
3. Recognize that when demand is elastic (\(E_d > 1\)), lowering the price increases total revenue, and when demand is inelastic (\(E_d < 1\)), lowering the price decreases total revenue.
4. Identify that total revenue is maximized at the point where demand is unit elastic, meaning \(E_d = 1\), because this is where the percentage change in quantity demanded exactly offsets the percentage change in price.
5. Therefore, Barry maximizes total revenue by setting the price at the point on the demand curve where the price elasticity of demand equals 1 (unit elastic).