Question

When a sales manager charged a price of $10, approximately 4,000 units were sold, however, when the price increased by 10% the demand decreased by 1,000 units. The Manager wants to know the following (based on operating cost of $7 per unit:

What is the MR? (b) What price would maximize profit? (c) What impact would a price decrease have on revenue?

Answer #1

a) Marginal revenue is the rate of change in the total revenue with respect to change in total sales.

therefore:

Marginal revenue = Chage in Total Revenue/ Change in Total sales

price level | sales | total revenue | marginal revenue |

10 | 4000 | 40000 | - |

11 | 3000 | 33000 | -7000/-1000= 7 |

b) profit maximise if diffrence between total revenue and total cost is maximum

price level | units | total revenue | operating cost | total cost | profit |

10 | 4000 | 40000 | 7 | 28000 | 12000 |

11 | 3000 | 33000 | 7 | 21000 | 8000 |

Therefore profit is maximize at Price $10 per unit which is $12000 on the sale of 4000 units

c)

price level | unit sold | total revenue |

10 | 4000 | 40000 |

11 | 3000 | 33000 |

with 10% rise in in price level from $10 to $11 total revenue falls from $40000 to $33000 which is reduced by $7000

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