Price Quantity Price Quantity $100 1 $70 5 $95 2 $55 6 $88 3 $40 7 $80 4 $22 8 D

Question

Price                Quantity                   Price                   Quantity
$100                   1                            $70                      5
$95                     2                            $55                      6
$88                     3                            $40                      7
$80                     4                            $22                      8

Does this demand schedule apply to a perfectly competitive firm?Compute marginal and average revenue.

Suppose the marginal cost of producing the good is changed to $8per unit, what quantity of output will the firm produce?

Explanation / Answer

This schedule does not apply to a perfectly competitive firm,because for a competitive firm, they're unable to charge differentprices for different quantities. Marginal revenue is the extra revenue that an additional unit ofproduct brings. For example, suppose the company currently sold 1unit at $100. To sell an additional unit, it must lower the unitprice to $95. So while the second unit brings in $95 of revenue, $5was lost on the first unit due to the price decrease. The marginalrevenue is $90. To sell an additional unit, it must again lower theunit price to $88, losing revenue on the previous 2 units. Themarginal revenue is $88 - $7 - $7 = $74. Continuing this calculation, you should arrive at 80 - 3*8 = 56, 70- 4*10 = 30, 55 - 5*15 = -20, etc. Average revenue is the price. The optimal quantity occurs when marginal cost equals marginalbenefit, where MR = MC. Continuing the calculation for marginalrevenue, you should arrive at a quantity of 5 units.

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