If a business can sell 300 units at a price of $10 but only 280 units at $11, wh

ID: 1220336 • Letter: I

Question

If a business can sell 300 units at a price of $10 but only 280 units at $11, which of the following can we conclude?

a) marginal revenue is negative

b) marginal revenue is decreasing, but it is still greater than price

c) demand is elastic and marginal revenue is positive

d) demand is elastic and marginal revenue, though positive, is less than marginal cost

e) total revenue increases, so demand must be inelastic

a) marginal revenue is negative

b) marginal revenue is decreasing, but it is still greater than price

c) demand is elastic and marginal revenue is positive

d) demand is elastic and marginal revenue, though positive, is less than marginal cost

e) total revenue increases, so demand must be inelastic

Option (a).

At 280 units, total revenue (TR) = price x quantity = $11 x 280 = 3,080

At 300 units, TR = $10 x 300 = $3,000

Marginal revenue (MR) = Change in TR / Change in Q = $(3,000 - 3,080) / (300 - 280) = - $80 / 20 = - $4

So, MR is negative.

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