ELASTICITIES OF DEMAND AND MARGINAL REVENUE Use the figure below, which shows a
ID: 1169000 • Letter: E
Question
ELASTICITIES OF DEMAND AND MARGINAL REVENUE Use the figure below, which shows a linear demand curve and the associated total revenue curve, to answer the questions 1-5 1. The pnce for which 100 units can be sold is $ 10 b. 15 c. 25 d. 45 e. 50 2. The pnce at which total revenue is maximized is $ 10 b. 15 c. 20 d. 25 . 30 The marginal revenue of the 100th unit is $ 20 40 50 cannot tell from the information provided b. d. e- 4. The marginal revenue of the 700th unit is $and demand is at this point .-20; elastic b.20; inelastic c. 15; elastic d. 1S; inelasticExplanation / Answer
(1) (d)
Demand curve equation:
P = a - bQ
When Q = 1, P = 50 = a
When P = 0, Q = a / b = 1,000
50 / b = 1,000
b = 0.05
So equation is
P = 50 - 0.05Q
When Q = 100, P = 50 - 5 = 45
(2) (d)
TR = PQ = 50Q - 0.05Q2
When TR = 0, MR = dTR / dQ = 0
50 - 0.1Q = 0
Q = 50 / 0.1 = 500
P = 50 - 0.05Q = 50 - 25 = 25
(3) (c)
MR = 50 - 0.1Q
When Q = 100, MR = 40
(4) (b)
When Q = 700, MR = - 20
So demand is inelastic.
(5) (e)
Maximum TR = PQ = 25 x 500 = 12500 [See Q(2)]
(6) (c)
When demand is inelastic, that is, change in Q is lower than change in P, total revenue increases with increase in P.
(7) (a)
(8) (e)
(9) ()
When Q = 1000, TR = 1000 x 200 = 200,000
When Q = 1400, TR = 1400 x 150 = 210,000
MR = 10,000
(10) (b)
eP = Change in Q / Change in P = [(1800 - 1400) / 1400] / [(100 - 150) / 150]
= 0.29 / - 0.33 = - 0.86
Closest option is - 1.
NOTE: Out of 15 questions, the first 10 are answered.
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