Question
Consider a profit-maximizing firm which is the only seller in a particular market. The firm’s marketing...
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)
Homework Answers
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.
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