Final answer:
The demand for the product is unit elastic because the percentage change in price resulted in an equivalent percentage change in total revenue. When the demand is unit elastic, it is advised that the company maintain its current price level to keep total revenue maximized.
Step-by-step explanation:
If the price of a good is initially 1 and the total revenue is 200, and then the price increases to 2 and the total revenue subsequently increases to 400, we can conclude that the demand for the product is unit elastic. This is because the percentage change in price (which is a 100% increase, from 1 to 2) is exactly matched by the percentage change in total revenue (which also doubled, indicating a 100% increase).
Understanding price elasticity of demand is crucial in such scenarios. If the elasticity is exactly 1, as in this case, any percentage change in the price leads to an equivalent percentage change in quantity demanded, thus the total revenue remains unchanged. According to this concept, when the demand is unit elastic, the company is advised to maintain its current price level, as elasticity of 1 implies total revenue is already maximized.