A monopolistic firm lowers its price and total revenue increases. Describe the demand curve facing this monopoly.

• A. Inelastic
• B. Elastic
• C. Unit elastic
• D. Perfectly elastic

Answer: (B)

The key idea is how total revenue responds to price changes, which depends on elasticity. If a monopolist lowers the price and total revenue rises, the quantity gained from the lower price must be large enough that the percentage increase in quantity exceeds the percentage decrease in price. That means demand is elastic (elasticity greater than one) at that point. The monopoly faces a downward-sloping demand curve, and along the portion where elasticity is greater than one, lowering price increases revenue. If demand were inelastic, lowering price would reduce revenue; if it were unit elastic, revenue would stay the same; a perfectly elastic demand would imply an extreme responsiveness that doesn’t match the scenario. So the demand facing the monopoly in this situation is elastic.