Question 1

(Figure: Marginal Revenue) What is the marginal revenue of the fifth unit in the following example?

Accepted Answer

The answer of (Figure: Marginal Revenue) What is the marginal...

Question 2

Marginal revenue reflects the _____ effect and the _____ effect.

Accepted Answer

Marginal revenue reflects the output effect, which is the additional revenue from selling one more unit, and the discount effect, which is the reduction in revenue from lowering the price to sell additional units.

Question 3

Your company sells 19 units at a price of $10 and must change price to $9.90 in order to sell 20 units. What is the marginal revenue of the twentieth unit?

Accepted Answer

Marginal revenue is the change in total revenue divided by the change in quantity sold. In this case, the change in total revenue is $9.90 - $10 = -$0.10, and the change in quantity sold is 20 - 19 = 1. Therefore, the marginal revenue of the twentieth unit is -$0.10 / 1 = -$0.10.

Question 4

For a seller with market power, as the number of units sold increases, marginal revenue

Accepted Answer

For a seller with market power, as they increase the number of units sold, the marginal revenue will fall below the price. This is because in order to sell additional units, the seller must lower the price for all units sold, as opposed to a perfectly competitive market where the price is fixed and the seller earns the same revenue per unit sold. Therefore, the additional revenue earned from each additional unit sold is less than the revenue earned from the previous unit sold, causing marginal revenue to decline below the price.

Question 5

How does marginal revenue compare to price for a seller with market power?

Accepted Answer

For a seller with market power, the seller can influence the market price. This means that the seller can set a price that is higher than the cost of producing an additional unit. As a result, the seller faces a downward-sloping demand curve, since each additional unit sold brings in less revenue due to the lower price. This means that beyond the first unit sold, marginal revenue is below price. Therefore, the correct choice is C.

Question 6

Marginal revenue is the difference between output effect or price and the _____ effect for a given quantity.

Accepted Answer

The answer of Marginal revenue is the difference between output...

Question 7

As the quantity sold rises, how does marginal revenue compare to price for a company with market power?

Accepted Answer

When a company has market power, it has the ability to influence the market price of its product. As the quantity sold increases, the company must lower the price in order to maintain demand. This means that the marginal revenue earned on each additional unit sold decreases, and falls further and further below the price the company is charging. Therefore, choice A is the best answer.

Question 8

The Rational Rule for Sellers is that sellers should choose the quantity _____ and choose the price _____.

Accepted Answer

The Rational Rule for Sellers suggests that the optimal quantity to produce is where marginal revenue equals marginal cost, ensuring profit maximization. The price should be set based on the demand curve for that specific quantity, ensuring the price is what consumers are willing to pay for that quantity.

Question 9

According to the Rational Rule for Sellers, a seller should choose the output level where _____ and the price level _____.

Accepted Answer

The Rational Rule for Sellers suggests that a seller should produce at an output level where marginal cost equals marginal revenue, which means that the seller is producing at the point where they are earning the highest possible profit. This point is on the seller's demand curve at that output level. Therefore, option A is the correct answer.

Question 10

(Figure: Output Level) According to the rational rule, what output and price should the firm in the following example choose?

Accepted Answer

The rational rule states that a profit-maximizing firm should produce the quantity of output where marginal revenue equals marginal cost. Looking at the graph, the point where marginal revenue equals marginal cost is at an output level of 4. At that level, the price would be $7.00. Therefore, the best choice for the firm is to produce 4 units of output at a price of $7.00.

Question 11

(Figure: Output Level 2) What price and output should the firm in the following example choose according to the Rational Rule for Sellers if MC = $4?

Accepted Answer

The answer of (Figure: Output Level 2) What price and...

Question 12

According to the Rational Rule for Sellers, this company should produce ____ of output and charge a price of _____.
$$\begin{array} { | l | l | l | l | l | l | } 
\hline \text { Quantity } & \text { Price } & \begin{array} { l } 
\text { Total } \
\text { revenue }
\end{array} & \begin{array} { l } 
\text { Total } \
\text { cost }
\end{array} & \begin{array} { l } 
\text { Marginal } \
\text { revenue }
\end{array} & \begin{array} { l } 
\text { Marginal } \
\text { cost }
\end{array} \
\hline 1 & \$ 300 & \$ 300 & \$ 100 & \$ 300 & \$ 100 \
\hline 2 & \$ 250 & \$ 500 & \$ 200 & \$ 200 & \$ 100 \
\hline 3 & \$ 200 & \$ 600 & \$ 300 & \$ 100 & \$ 100 \
\hline 4 & \$ 150 & \$ 600 & \$ 400 & \$ 0 & \$ 100 \
\hline
\end{array}$$

Accepted Answer

The Rational Rule for Sellers suggests producing up to the point where marginal revenue equals marginal cost. In the table, this condition is met at the production of three units, where both marginal revenue and marginal cost are $100.

Question 13

According to the Rational Rule for Sellers, the manager of this company should choose to produce _____ of output and charge a price of _____.
$$\begin{array} { | l | l | l | l | l | l | } 
\hline \text { Quantity } & \text { Price } & \begin{array} { l } 
\text { Total } \
\text { revenue }
\end{array} & \begin{array} { l } 
\text { Total } \
\text { cost }
\end{array} & \begin{array} { l } 
\text { Marginal } \
\text { revenue }
\end{array} & \begin{array} { l } 
\text { Marginal } \
\text { cost }
\end{array} \
\hline 1 & \$ 500 & \$ 500 & \$ 400 & \$ 500 & \$ 400 \
\hline 2 & \$ 450 & \$ 900 & \$ 800 & \$ 400 & \$ 400 \
\hline 3 & \$ 400 & \$ 1,200 & \$ 1,200 & \$ 300 & \$ 400 \
\hline 4 & \$ 350 & \$ 1,400 & \$ 1,600 & \$ 200 & \$ 400 \
\hline
\end{array}$$

Accepted Answer

The Rational Rule for Sellers states that a firm should produce up to the point where marginal revenue equals marginal cost. At two units, marginal revenue ($400) equals marginal cost ($400), and the price is $450.

Question 14

Why would the owner of the following company decide NOT to produce and sell the fourth unit, even though it adds less to costs than the price he could get for it?
$$\begin{array} { | l | l | l | l | l | l | } 
\hline \text { Quantity } & \text { Price } & \begin{array} { l } 
\text { Total } \
\text { revenue }
\end{array} & \text { Total cost } & \begin{array} { l } 
\text { Marginal } \
\text { revenue }
\end{array} & \begin{array} { l } 
\text { Marginal } \
\text { cost }
\end{array} \
\hline 1 & \$ 300 & \$ 300 & \$ 100 & \$ 300 & \$ 100 \
\hline 2 & \$ 250 & \$ 500 & \$ 200 & \$ 200 & \$ 100 \
\hline 3 & \$ 200 & \$ 600 & \$ 300 & \$ 100 & \$ 100 \
\hline 4 & \$ 150 & \$ 600 & \$ 400 & \$ 0 & \$ 100 \
\hline
\end{array}$$

Accepted Answer

The fourth unit adds no additional revenue ($0 marginal revenue) despite having a selling price, indicating that selling this unit does not increase total revenue, hence it's not beneficial to produce and sell it.

Question 15

The basic logic behind the Rational Rule for Sellers is that a company owner should increase output as long as the extra output

Accepted Answer

The basic logic behind the Rational Rule for Sellers is to increase output as long as the extra output adds more to revenue than it adds to costs. This ensures that the company is maximizing its profits and operating efficiently.

Question 16

In a perfectly competitive market, a company's marginal revenue equals _____. For a company with market power, marginal revenue is _____.

Accepted Answer

In a perfectly competitive market, a company's marginal revenue equals the market price because the company cannot influence the price. For a company with market power, the marginal revenue is less than the price because it has to lower the price to sell additional units.

Question 17

Based on the Rational Rule for Sellers, how does a manager set price and quantity? If the company has no market power, the marginal cost _____ price. If the company has market power, the marginal cost is _____ than price.

Accepted Answer

If the company has no market power, the price is set equal to the marginal cost. If the company has market power, the price is set higher than the marginal cost.

Question 18

How is the result of the Rational Rule for Sellers different for companies with market power versus companies with no market power?

Accepted Answer

The Rational Rule for Sellers states that companies will produce where marginal cost equals marginal revenue. However, for companies with market power, they can charge a higher price since they have some degree of control over the market. This means that the price will be higher for companies with market power compared to those with no market power.

Question 19

Companies with market power face a trade-off between

Accepted Answer

Companies with market power often face a trade-off between having a higher profit margin (by setting higher prices) and selling a larger quantity (which might require lower prices). This balance affects their overall profitability and market strategy.

Question 20

Following the Rational Rule for Sellers, how does output for a seller who has market power compare to output for a seller who does not have market power?

Accepted Answer

Output is typically higher without market power than with market power because a seller with market power will restrict output to increase prices and maximize profits, whereas a seller in a competitive market will produce more at lower prices due to the competitive pressure.

Quiz 14: Market Structure and Market Power