Question

Consider a profit-maximizing firm which is the only seller in a particular market. The firm’s marketing research department has estimated the demand for, and the marginal revenue from your firm’s product is described by the following equations: P = 100 – 0.01Q and MR = 100 – 0.02Q. Consider that the firm’s cost structure is described by the following equations: MC = 40 + 0.02Q and AVC = 40 + 0.01Q. Furthermore, the firm’s only fixed cost is the $24000 lease payment it has for the fully furnished building it rents.

At the current price being charged, the price elasticity of demand is $________.

One can conclude that a decrease in the price of the good would lead the quantity demanded to:

_________ (decrease | ambiguous change | increase | no change)

One can conclude that a decrease in the price of the good would lead the firms total revenue to: _______

(decrease | ambiguous change | increase | no change)

Answer 1

Ans

Elasticity of demand = 5.67

Decrease in the price of good leads to increase in the quantity demanded as there is negative relation between price and quantity demanded

Due to decrease in the price, total revenue of firm will increase, as the demand is highly elastic. A little bit decrease in the price leads to increase in the quantity demanded by very large amount. Hence, total revenue of firm will increase.