"Assume that when price is 20 rupees, the quantity demanded is 9 units and when price is 19 rupees, the quantity demanded is 10 units."

Based on this information, what is the marginal revenue resulting from an increase in output from 9 to 10 units ?

Question

"Assume that when price is 20 rupees, the quantity demanded is 9 units and when price is 19 rupees, the quantity demanded is 10 units."

Based on this information, what is the marginal revenue resulting from an increase in output from 9 to 10 units ?

Accepted Answer

The correct option is 2:

Marginal Revenue (MR) is the additional revenue generated by selling one more unit of a good. The formula for Marginal Revenue is the change in Total Revenue divided by the change in Quantity ($	ext{MR} = \frac{	ext{Change in TR}}{	ext{Change in Q}}$). To find the MR when output increases from 9 to 10 units, we must first calculate the Total Revenue (TR) at both output levels.

At 9 units of output, the price is 20 rupees.
Total Revenue ($\text{TR}\_9$) = Price $\times$ Quantity = $20 \times 9 = 180$ rupees.

At 10 units of output, the price falls to 19 rupees (indicating this is not a perfectly competitive market where price stays constant).
Total Revenue ($\text{TR}\_{10}$) = Price $\times$ Quantity = $19 \times 10 = 190$ rupees.

Now, we calculate the Marginal Revenue resulting from the increase from 9 to 10 units:
$\text{MR} = \text{TR}\_{10} - \text{TR}\_9 = 190 - 180 = 10$ rupees. This calculation confirms that 10 is the correct marginal revenue.

The incorrect option is 1 (1): This value is the difference between the initial price (20) and the new price (19), which represents the change in price, not the marginal revenue.

The incorrect option is 3 (19): This value is the price at which the 10th unit is sold. In an imperfect market, Marginal Revenue is typically less than price (except for the first unit) because the firm must lower the price on all previous units to sell an additional unit.

The incorrect option is 4 (20): This value is the price at which the first 9 units were sold. It represents the Average Revenue ($	ext{AR}$) at 9 units, not the Marginal Revenue of the 10th unit.