Question

When quantity sold (Q) is 400, price or average revenue (AR) is $20. When Q = 450, AR = $19. What is the marginal revenue (MR) per unit sold when Q increases from 400 to 450? Reminder: MR is defined as the increase in total revenue when quantity increases by one unit.

a) $11

b) $550

c) $8,550

d) there is not enough information to calculate MR here.

NOTE: I am preparing for a test. I know that the answer to this question is (a) because the teacher provided us key but I need to understand how is it the answer. Please explain in detail. Thank you!

Answer 1

When quantity sold (Q) is 400, price is $20.

Total revenue = Price * Quantity = $20 * 400 = $8,000

When quantity sold (Q) is 450, price is $19.

Total revenue = Price * Quantity = $19 * 450 = $8,550

Calculate change in total revenue -

Change in total revenue = $8,550 - $8,000 = $550

Calculate change in quantity -

Change in quantity = 450 - 400 = 50

Calculate the marginal revenue when Q increases from 400 to 450 -

Marginal revenue = Change in total revenue/Change in quantity = $550/50 = $11

The marginal revenue (MR) per unit sold when Q increases from 400 to 450 is $11.

Hence, the correct answer is the option (a).