I am completely new to economics, and am looking at some old exam papers. The question is as following:
"In a normal marked, where there is a negative correlation between quantity and price, which of the following are true for elasticity of demand, marginal revenue, and total revenue?"
The correct alternative was:
d) When the absolute value of elasticity is 1, the marginal revenue is 0, and total revenue is maximized
I was wondering:
Why is the total revenue maximized when marginal revenue is 0? I know that, usually, total revenue is maximized when marginal revenue = marginal cost. In this case, however, no information is given about the marginal cost, so it does not make sense to me that it should be 0.
Also, is the marginal revenue always 0, when elasticity is exactly equal to 1? How does that make sense?