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IAI Actuarial Core Principles · Business Economics · Production, costs, revenue and profit in price and output decisions

A firm facing a downward-sloping straight-line demand curve raises output from 10 to 11 units. Price falls from Rs 50 to Rs 48. What is the marginal revenue of the 11th unit?

The marginal revenue of the 11th unit is Rs 28. Total revenue rises from Rs 500 to Rs 528, a gain of Rs 28, because the extra unit sells for Rs 48 but the price cut loses Rs 20 on the first 10 units.

  1. ARs 48
  2. BRs 28Correct
  3. CRs 38
  4. DRs 50
  5. Rs 2

Explanation

TR at 10 units = 50 x 10 = 500. TR at 11 units = 48 x 11 = 528. MR = 528 - 500 = Rs 28. Rs 48 is the mistake of treating price as marginal revenue, ignoring the price cut on earlier units.

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