Question

Refer to the information provided in Figure 13.3 below to answer the questions that follow. 10 8 7 (Note: Point A is the midpoint of the demand curve) Price per unit חין 4 Demand 0 2 3 4 5 6 Pounds of cheese at At Point A the elasticity of demand is -1 5 Figure 13.3 18 Refer to Figure 13.3. This firm's marginal revenue will be negative at 21 24 prices between $4 and $8. prices above $5. prices below $5. all prices.

Answer 1

Answer to the question:

Option c: Prices below $5.

Explanation: We know that at the mid point of the demand curve (AR) curve, the price elasticity of demand is 1. And at the below part of the mid point of the demand curve, the price elasticity of demand is less than 1 (say 0.5). Thus, using the elasticity of demand formula we can show this as:

$E_p=\frac{AR}{(AR-MR)}$

$AR-MR=\frac{AR}{E_p}$

$-MR=\frac{AR}{E_p}-AR$

$MR=AR-\frac{AR}{E_p}$

Now, putting Ep=0.5, and AR=4, we will get:

$MR=4-\frac{4}{0.5}$

$MR=4-8=-4$

Thus, we can see that when the AR is below the mid point the elasticity of demand is less than 1 and the MR become negative. At the midpoint, the MR=0.

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