Question

3. The components of marginal revenue 

Alex's Fire Engines is the sole seller of fire engines in the fictional country of Pyrotania. Initially, Alex produced eight fire engines, but he has decided to increase production to nine fire engines. The following graph shows the demand curve Alex faces. As you can see, to sell the additional engine, Alex must lower his price from $80,000 to $40,000 per fire engine. Note that while Alex gains revenue from the additional engine he sells, he also loses revenue from the initial eight engines because he sells them all at the lower price. 

Use the purple rectangle (diamond symbols) to shade the area representing the revenue lost from the initial eight engines by selling at $40,000 rather than $80,000. Then use the green rectangle (triangle symbols) to shade the area representing the revenue gained from selling an additional engine at $40,000 

Alex ________ increase production from 8 to 9 fire engines because the _______ dominates in this scenario. 

True or False: If Alex's Fire Engines were a competitive firm instead and $80,000 were the market price for an engine, increasing its production would not affect the price at which he can sell engines. 

• True 

• False

Answer 1

Represent the graph as follows: 200 180 160 140 120 Revenue lost 100 Price Demand Revenue gained 3 6 7 8 9 Quantity In the above graph, the purple shaded region is the revenue lost and green shaded region is the revenue gained. With the increase in price the quantity as declined. Alex shouldn't increase production from 8 to 9 fire engines, because the price effect dominates in this scenario. If Alex's fire engines were a competitive firm instead and $80,000 were the market price for an engine, increasing its production would not affect the price at which he can sell engines.

Explanation: In a competitive market, in contrast to a monopolistic market, individual firms are too small to affect price through changes in output. Therefore, if Alex's Fire Engines were a competitive firm, an expansion of output would leave the market price of fire engines unchanged. The given statement is True. Note: For the true or false, if your question has "increasing its production WOULD NOT the price", then the answer is true. If your question says "increasing its production WILL AFFECT, the price" then the answer will be false