Question

A coffee vendor can sell 20 mocha lattes an hour at a price of $2.50. If...

A coffee vendor can sell 20 mocha lattes an hour at a price of $2.50. If the vendor lowers the price to $2.40, the vendor can sell 21 mocha lattes per hour.

a. Compute the vendor's marginal revenue for that 21st mocha latte. $ Suppose the vendor's marginal cost of a mocha latte is $1.00.

b. If the vendor follows through and lowers the price of a mocha latte to $2.40, will the vendor's profit increase or decrease?

c. By how much? $

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Answer #1

(a)

20 mocha lattes can be sold at $2.50.

Total revenue from 20 mocha lattes = 20 * 2.50 = $50

21 mocha lattes can be sold at $2.40.

Total revenue from 21 mocha lattes = 21 * 2.40 = $50.4

Calculate the marginal revenue from the 21st mocha lattes -

MR = TR of 21 mocha lattes - TR of 20 mocha lattes = $50.4 - $50 = $0.40

The marginal revenue for the 21st mocha latte is $0.40

(b)

If vendor follows through and lowers the price of a mocha latte to $2.40 then marginal revenue from additional unit sold (21st mocha latte) is $0.40 while marginal cost is $1.

When MC exceeds MR, profit decreases.

So, the vendor's profit will decrease.

(c)

Decrease in profit = MC - MR = $1 - $0.40 = $0.60

The vendor's profit will decrease by $0.60.

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