Explain why the marginal revenue of the fourth unit of output is $3.50, even though its price is $5.00. Use Chapter 6's total-revenue test for price elasticity to designate the elastic and inelastic segments of your graphed demand curve. What generalization can you make as to the relationship between marginal revenue and elasticity of demand? Suppose the marginal cost of successive units of output was zero. What output would the profit-seeking firm produce? Finally, use your analysis to explain why a monopolist would never produce in the inelastic region of demand: Answers: Table of total revenue and marginal revenue is below: Quantity Marginal Price (P) Total Revenue Demanded (Q) Revenue $7.00 0 $0 $1 $6.50 1 $6.50 $6.50 $6.00 2 $12 $5.50 $5.50 3 $16.50 $4.50 $5.00 4 $20 $3.50 $4.50 5 $22.50 $2.50 $4.00 6 $24 $1.50 $3.50 7 $24.50 $0.50 $3.00 8 $24 $ -1.50 $2.50 9 $22.50 See the Because TR is increasing at a diminishing rate, MR is declining. When TR turns downward, MR becomes negative. Marginal revenue is below D because to sell an extra unit, the monopolist must lower the price on the marginal unit as well as on each of the preceding units sold.
Explain why the marginal revenue of the fourth unit of output is $3.50, even though its price is $5.00. Use Chapter 6's total-revenue test for price elasticity to designate the elastic and inelastic segments of your graphed demand curve. What generalization can you make as to the relationship between marginal revenue and elasticity of demand? Suppose the marginal cost of successive units of output was zero. What output would the profit-seeking firm produce? Finally, use your analysis to explain why a monopolist would never produce in the inelastic region of demand: Answers: Table of total revenue and marginal revenue is below: Price (P) Quantity Demanded (Q) Total Revenue Marginal Revenue $7.00 $6.50 $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 0 1 2 3 4 5 6 7 8 9 $0 $6.50 $12 $16.50 $20 $22.50 $24 $24.50 $24 $22.50 $1 $6.50 $5.50 $4.50 $3.50 $2.50 $1.50 $0.50 $ -1.50 See the Because TR is increasing at a diminishing rate, MR is declining. When TR turns downward, MR becomes negative. Marginal revenue is below D because to sell an extra unit, the monopolist must lower the price on the marginal unit as well as on each of the preceding units sold.
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