Question

When demand is unit elastic, the _______________ effect and the _______________ effect balance each other, so a fall in _______________ has _______________ effect on total revenue. The Ed in this case equals _______________.

a) Substitution, income, price, no
b) Income, substitution, quantity demanded, no
c) Substitution, income, quantity demanded, no
d) Income, substitution, price, no

Answer 1

When demand is unit elastic, the substitution effect and the income effect balance each other, so a fall in price has no effect on total revenue. The price elasticity of demand (Ed) in this case equals 1.

Step-by-step explanation:

A decrease in price has both a substitution effect and an income effect. The substitution effect occurs when the product becomes cheaper relative to other goods, leading consumers to buy more of the product and less of other goods. The income effect refers to consumers' ability to purchase the same goods as before at a lower price, allowing them to have money left over to buy more. In the case of unit elastic demand, these two effects balance each other out, resulting in no change in total revenue. The price elasticity of demand (Ed) in this case equals 1, indicating a proportional change in quantity demanded with a change in price.