Question

T or F, For a price making firm, MR is positive where demand elasticity is inelastic.

Answer 1

False

Marginal revenue function is a declining function of output for a price making firm. This is because price is greater than marginal revenue at every quantity and therefore diminishing marginal returns indicates that marginal revenue will continue to decline. It is zero when total revenue is maximum and the demand is unitary elastic. Before this level of output that maximizes revenue, the demand function is relatively elastic. However after this level of output the demand function becomes inelastic and therefore marginal revenue turns negative.