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