Question

QUESTION 1 Following is the demand schedule facing the individual firm. Quantity demanded 0 Average revenue $_ Total revenue Price $10 10 Marginal revenue Hemtino 10 a. Complete the table by computing average revenue, total revenue, and marginal revenue. b. Is this firm operating in a market that is purely competitive? How can you tell? c. The coefficient of the price elasticity of demand is the same between every pair of quantities demanded. What is it? d. What relationship exists between average revenue and marginal revenue?

Answer 1

Ans.1. a)

Price	Quantity demanded	Average Revenue	Total Revenue	Marginal Revenue
$10	0	$0	$0	---
10	1	10	10	$10
10	2	10	20	10
10	3	10	30	10
10	4	10	40	10
10	5	10	50	10
10	6	10	60	10

Note: 1) Total Revenue = price X quantity demanded

2) Average Revenue = Total Revenue/ quantity

3) Marginal Revenue = change in Total Revenue/ change in quantity

b) Yes, this firm is operating in a market that is purely competitive because of P = AR = MR which shows that this firm is a price taker in a purely competitive market.

c) change in Price = 0 and change in Quantity demanded = 1

At P = $10 and Qd = 1

The price elasticity of demand ( Ed) = %change in quantity demanded/ %change in price

= change in Qd/change in P x P /Qd

= 1/0 x 10/1

Ed = infinity

Note: The coefficient of price elasticity of demand is the same between every pair of quantities demanded.

d) Average revenue and marginal revenue constant and equal to the price level at each quantity demanded.