Question

In a unit elastic demand, MR is equal to _______ and the price effect is equal to _________ effect in absolute value.

0: Total

-1: Total

0: Output

-1: Output

Answer 1

Unitary price elasticity of demand means that price elasticity of demand(e) = -1

MR = Marginal Revenue = d(TR)/dQ = d(PQ)/dQ = P + Q(dP/dQ) = P(1 + (Q/P)(dP/dQ)) = P(1 + 1/e)

where TR = Total Revenue = P*Q, P = price, Q = quantity and e = elasticity of demand = (dQ/dP)(P/Q)

So, e = -1 => MR = Marginal Revenue = P(1 + 1/(-1)) = 0

Hence, MR = Marginal Revenue = 0.

This means that Price effect = Output effect(When MR = 0, an additional quantity neither decreases nor increases revenue implies that Both price and output effect are equal).

Hence the correct answer is (c) 0: Output