Why are total expenditures on a good maximized at the point on the demand curve where the price elasticity of demand equals -1? Explain your answer using the appropriate algebra.
What will be an ideal response?
When total expenditures are maximized, neither an increase of decrease in price will increase expenditures. This is only true when E = -1. The formula for price elasticity of demand is E = (%?Q)/(%?P). If E > -1 (that is, if demand is elastic) then (%?Q) > (%?P). This is implies that a relatively small decrease in price will increase sales by a relatively larger amount, so total expenditures on the good will increase. If E < -1 (that is, if demand is inelastic) then (%?Q) < (%?P). This is implies that a relatively large increase in price will decrease sales by a relatively smaller amount, so total expenditures on the good will increase. Thus, when E > -1, total expenditures can be increased by lowering the price of the good.
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Which of the following has served most recently as Chairman of the Board of Governors of the Federal Reserve System?
A) Nancy Pelosi B) Alan Greenspan C) Ben Bernanke D) Paul Volcker
The aggregate demand curve indicates the relationship between:
a. the real wage rate and the quality of resources demanded by producers of goods and services. b. the interest rate and the amount of loanable funds demanded by borrowers. c. the natural rate of unemployment and the demand for goods and services when the economy is in long-run equilibrium. d. the general price level and the aggregate quantity of goods and services demanded.