According to the total revenue test, total revenue will rise under which of the following circumstances?

• A. When price increases and demand is unit elastic
• B. When price decreases and demand is inelastic
• C. When price increases and demand is elastic
• D. When price decreases and demand is elastic

Answer: (D)

Verified step by step guidance

1. Recall the total revenue (TR) test, which helps determine the price elasticity of demand by observing how total revenue changes when price changes.
2. Understand that total revenue is calculated as \(TR = P \times Q\), where \(P\) is price and \(Q\) is quantity demanded.
3. Know the relationship between elasticity and total revenue: if demand is elastic (elasticity > 1), a decrease in price leads to a proportionally larger increase in quantity demanded, causing total revenue to rise.
4. Analyze each option by considering whether the price change and elasticity condition would increase or decrease total revenue based on the elasticity definition.
5. Conclude that total revenue rises when price decreases and demand is elastic, because the increase in quantity demanded more than offsets the price drop.