Scenario: When a monopolist charges $10 for its product, it sells 500 units of t

Question

Scenario: When a monopolist charges $10 for its product, it sells 500 units of the product. When it lowers the price to $6, it sells 1,400 units of the product. 4) Refer to the scenario above. What is the quantity effect of the price change? A) $1,400 B) $2,700 C) $5,400 D) $6,750 5) Refer to the scenario above. What is the price effect of the price change? A) $1,750 B) $2,000 C) $3,750 D) $5,400 6 Refer to the scenario above. What is the change in total revenue due to the price change? A) The total revenue increases by $350. B) The total revenue increases by $3,400. C) The total revenue decreases by $1,650. D) The total revenue decreases by $2,275.

Explanation / Answer

4) The quantity effect of the price change from $10 to $6 is c) $5400

Quantity effect can be defined as an increase in total revenue from the sale of extra 900 units at a cost of $6, which is 900 x $6 = $5400.

5) Price effect can be defined as the decrease in total revenue from having a lower price. Before reducing the price the monopolist was selling 500 units. So. price change will be 500 x $4 = $2000.

Hence the right Answer is $2000.

6) Due to the price change, the total revenue increased by $3400. Before the price change, the monopolist was selling 500 units at a price of $10 and earning a revenue of $5000. Now he is selling 1400 units at a price of $6 earning a revenue of $8400. The right answer is (b) $3400.  

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