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CA Foundation · Business Economics · Theory of Demand and Supply

A firm faces a downward-sloping straight-line demand curve. As the firm moves down the curve by lowering price, it finds that total revenue is rising. Which statement must be true at that stage?

When total revenue rises as price falls, marginal revenue is positive and demand is elastic (elasticity greater than 1). The quantity gain outweighs the price loss. Unitary elasticity with zero MR occurs only at the revenue maximum, and inelastic demand would make revenue fall.

  1. AMarginal revenue is positive and demand is elastic (elasticity greater than 1)Correct
  2. BMarginal revenue is negative and demand is elastic
  3. CMarginal revenue is positive and demand is inelastic
  4. DMarginal revenue is zero and demand is unitary elastic

Explanation

Total revenue rises when a price cut raises quantity enough to more than offset the lower price, meaning marginal revenue is positive. This happens only on the elastic part of the demand curve (e>1). Option 2 is wrong because negative MR means TR is falling. Option 4 describes the TR maximum point, not a rising TR.

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