Negative Marginal Revenue. The manager of your firm is puzzled because the large

Question

Negative Marginal Revenue. The manager of your firm is puzzled because the larger the quantity of output sold, the lower its total revenue. The manager gets weekly data in a table with two columns of numbers: Quantity Sold and Total Revenue. After you do some computations and add a third and a fourth column of numbers, the manager looks at the new table and says, "Aha, now I see why selling more decreases total revenue."

a. The third column of numbers has data on _______, and the fourth column has data on _________

b. How do the additional columns of numbers explain the negative relationship between quantity sold and total revenue?

A.

If the percentage increase in price is more than the percentage decrease in quantity, total revenue will fall.

B.

If the percentage increase in price is less than the percentage decrease in quantity, total revenue will rise.

C.

If the percentage decrease in price is greater than the percentage increase in quantity, total revenue will rise.

D.

If the percentage decrease in price is greater than the percentage increase in quantity, total revenue will fall.

Explanation / Answer

(a) marginal revenue and marginal cost.

Many a times increase in quantity doesn’t increase the total revenue its marginal revenue declines. This happens because of decrease in prices and increase in cost.

(b)(D) is the correct answer.Consider a price change further down the estimated demand curve – from £10 per unit to £8 per unit. The % change in demand = 13.3% following a 20% fall in price giving a co-efficient of elasticity of 0.665. A fall in price when demand is price inelastic leads to a reduction in total revenue.

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