- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 1. The Firm and Market Structures
- Subject 3. Marginal Revenue, Marginal Cost and Profit Maximization
CFA Practice Question
Company A is the only producer of widgets. At a price of $10, the quantity of widgets demanded is 200, while at a price of $8, the quantity demanded is 300. What is the marginal revenue Company A receives when production is at 200 widgets?
Correct Answer: $6
Use the formula: marginal revenue = price - (quantity * slope).
User Contributed Comments 21
| User | Comment |
|---|---|
| isida | shouldnt the asnwer be 4?? (2400-2000)/100 |
| kalps | yes, your formula is correct old boy the answer is $4 change in total revenue divided by change in quantity = marginal revenue |
| zglacier | the answer is correct ! because the formula MR = P -(Q * slope )is more precise !! |
| danlan | slope=(10-8)/(300-200)=0.02, Q=200, P=10 so MR=10-200*0.02=6 |
| msns | How can there be a marginal revenue in this case. We are actually selling more units at a lower price of $8. So aren't we actually incurring a loss. |
| bobert | Nope, just look at the math. 200 * 10 = 2000 300 * 8 = 2400 There is no loss, so just use the formula as stated above and you'll be good to go. Remember, a monopoly allows you to supply at a lower price, and have more sales which outweighs the extra you would earn if you sold at a higher price. |
| qazwsxedcrfvtgb | Revenue R = p(q) * q where p(q) is the price function of q. Marginal Revenue MR = dR/dq = p'(q)*q + p(q) Given: q = 200, p(q) = 10 And: p'(q) = (8-10)/(300-200)= -1/50 So: MR = -(1/50)*200 + 10 = 6 |
| nneks | Thanks qazwsxedcrfvtgb....i was now about to comment on the sloppy calculation of the slope above...posted by danlan. |
| Beret | Or: p = -0.02*q + 14 R = p*q = (-0.02*q + 14)*q MR = dR/dq = -0.04*q + 14 Fill in current point of q = 200 and find MR = 6 |
| desertfox27 | i really do not understand the logic of the formula. in the book, it only says MR = change in TR over change in quantity. Thus, the answer should be 4. |
| desertfox27 | thanks. i only got the explanation in the next question, MR = initial price - (initial quantity X slope). slope is change in price over change in quantity. please note it is in absolute value. |
| bundy | Change in Rise/ Change in Run X Price = MR |
| southeuro | tend to agree with isida. shouldn't MR be change in revenue over change in quantity therefore 400/100 = 4? |
| Sam123456 | Thanks Left Handed Typing Rule. That clears it up. |
| dmfz | i agree with desertfox |
| Shaan23 | You can use the Change in TR/ Change in Q if it's a perfectly competitive market(Perfectly elastic Demand). Here the demand function is downward sloping. You have to use the other method stated above in the comments |
| schweitzdm | How do you decide to use P=10 instead of P=8? |
| robbiecow | alternative calc to use is MR = P x (1 - 1/|elasticity|) 1. inelastic demand (D<1), selling more will decrease TR 2. elastic demand (D>1), selling more will increase TR |
| Yrazzaq88 | First of all: Step 1: Calculate the slope: Take ($8-$10) / (300-200) = -2/100 = -0.02 << Remember, that the slope is in negative format. Step 2: Now that we have the slope of -0.02, we will do the following to get MR= -0.02 x 200 (our quantity) + 10 (our price) = 6 |
| praj24 | Thanks Yrazzaq! |
| Freddie33 | Yrazzaq, based on the formula given in the answer, then with a negative slope you would get a MR of $14. It is when slope = 0.02 (positive) that results in MR = $6 (correct answer) |