CFA Practice Question
There are 539 practice questions for this study session.
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
|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
|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.
R = p(q) * q
where p(q) is the price function of q.
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.|
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.
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
|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)|