Suppose the equilibrium price in the market is $10 and the price elasticity of demand for the linear demand function at the market equilibrium is −1.25.Then we know that:
A) demand is inelastic.
B) marginal revenue is $2.
C) marginal revenue is $50.
D) demand is unit elastic.

Question

Quizplus · Accepted Answer

The price elasticity of demand at the equilibrium price is -1.25, which means demand is elastic (since the absolute value is greater than 1). Elastic demand implies that the percentage change in quantity demanded is greater than the percentage change in price. Marginal revenue (MR) can be calculated using the formula MR = P(1 + 1/Ed), where P is the price and Ed is the price elasticity of demand. Substituting the given values, MR = $10(1 + 1/(-1.25)) = $10(1 - 0.8) = $10(0.2) = $2. Therefore, the correct answer is that the marginal revenue is $2.

Suppose the Equilibrium Price in the Market Is $10 and the Price