CFA Practice Question
At a price of $30, a firm sells 150 units of output per day. The slope of the demand curve is 0.1 (in absolute value). If the marginal cost of production is $8, what should the firm do?
A. Increase price
B. Decrease price
C. Shut down
Explanation: MR = 30 - (150*0.1) = 15. Since marginal revenue exceeds marginal cost, the firm should produce more output, which requires lowering the price.
User Contributed Comments 10
| User | Comment |
|---|---|
| cbb1 | Marginal Revenue = Price less (Quantity x Absolute Value of Slope of Demand Curve) |
| danlan | Why MR=30-150*0.1? |
| danlan | Equation of the line is Q-30 = -0.1(P-150) Or Q=45-0.1P So PQ=45P-0.1*P*P While Revenue=PQ, MR=the derivative of PQ or 45-0.1*2*P=15. |
| Shelton | nice try by danlan, but P and Q should be swapped. |
| steved333 | Because it relates to the amount of output at the present price. |
| StanleyMo | can i think in this way, the demand curve looks like a horizontal, (competitive demand curve), so D almost equal MR, and price as well, and euqal 30, and MC is 8, we need MR=MC, so we will produce more quantities, and lowering the P. |
| prajacti | i agree with shelton. danlan, P & Q should be swapped in your eqn, remember "slope" of any line is (Y1-Y2)/(X1-X2). i think the "price elasticity of demand is 0.1", then we know that for unit decrease in price, firm sells 0.1*150 = 15 units more. MR then works out to be [(165*29)-(150*30)]/15 = 19 then as MR>MC, firm should sell more, i.e. lower prices |
| robbruhr | i looked at it this way - lower the price 8 dollars (30 to 22)gets you a Q of 220, which is greater total revenue (4840) than 150 @ 30 (4500). |
| gaetmichel | How come you substract a Quantity (Q*slope) from a $ Price? Shoudn't the slope of D curve be the elasticity ? Anyone ? |
| dybacis | gaetmichel: slope of D curve is (chg of P)/(chg of D) because P is the y axis. Elasticity is (%chg of Q)/(%chg of P) -0.1=(30-P)/(150-Q) so P=45-0.1Q, TR=45Q-0.1Q^2 and MR=45-0.2Q |