In the context of market equilibrium, at which price point will Rocco's maximize its total revenue?

• A. At the price where supply equals demand
• B. At the highest possible price consumers are willing to pay
• C. At the price where demand is unit elastic
• D. At the lowest possible price in the market

Answer: (C)

Verified step by step guidance

1. Understand that total revenue (TR) is calculated as the product of price (P) and 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 it is defined as \(E_d = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}\).
3. Recognize that when demand is unit elastic, the absolute value of the price elasticity of demand is exactly 1, meaning that the percentage change in quantity demanded equals the percentage change in price.
4. Know that total revenue is maximized at the price where demand is unit elastic because at this point, any small change in price will not increase total revenue further; increasing price reduces quantity demanded proportionally, and vice versa.
5. Therefore, to find the price that maximizes total revenue, identify the price at which the demand curve has unit elasticity, i.e., where \(|E_d| = 1\).