Final answer:
Total revenue is maximized when demand is unit elastic, which signifies a proportional change in quantity demanded for any change in price. Demand can be categorized as elastic, inelastic, or unit elastic, with unit elasticity representing the balance point where revenue is at its peak.
Step-by-step explanation:
Total revenue is maximized where demand is unit elastic. This concept pertains to the price elasticity of demand, which measures how much the quantity demanded responds to a change in price. According to elasticity theory, we can categorize the responsiveness of demand into three types: elastic, inelastic, and unitary.
An elastic demand has an elasticity greater than one, indicating a high responsiveness to price changes. Conversely, an inelastic demand indicates low responsiveness with an elasticity less than one. Unitary elasticity occurs when the percentage change in quantity demanded is equal to the percentage change in price, representing a situation where the demand curve is neither elastic nor inelastic.
When the demand is unit elastic, any change in price is exactly offset by a change in quantity such that total revenue remains unchanged. At this point, total revenue is maximized because if the product were any more elastic or inelastic, changes in price would either decrease revenue or not increase it by as great of a margin.