Question

Ques. (a) Find the marginal revenue of a firm that sells a product at the price of Rs. 10 and the price elasticity of the demand for the product it sells is (-)2.

(b) Find the price elasticity of demand of another firm that sells a product at P = Rs 16 and MR = Rs. 12.

(c) What would be the marginal cost of the firm is in part b.

Answer 1

Ans a.) The relationship between Price , elasticity and marginal revenue is given as follows:

MR = P(1 - (1÷e_d))

Where,

MR = marginal revenue

P = price

e_d = elasticity

Substituting the given values in part (a) gives,

MR = 10 (1 - (1÷2))

= 10(1÷2)

MR = Rs5

Ans b.)

Similarly, substituting the given values :

12 = 16 ( 1 - (1÷ e_d))

12 ÷ 16 = 1 - (1÷e_d)

3/4 = 1 - (1÷e_d)

1/e_d = 1 - (3/4)

e_d = 4

Ans C.)

If it is a profit-maximizing firm, then the marginal cost is equal to Rs12.

If It is a competitive firm, then the marginal cost is equal to Rs 16.