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

A general insurer faces a downward-sloping demand curve for a motor policy: P = 1,000 − 2Q, where P is the premium in rupees and Q is the number of policies sold. What is marginal revenue when Q = 100?

Marginal revenue is ₹600. Total revenue is 1,000Q − 2Q², so MR is 1,000 − 4Q, which equals 600 at Q = 100. The figure of ₹800 is the price, or average revenue, not marginal revenue.

  1. A₹800
  2. B₹600
  3. C₹400Correct
  4. D₹200
  5. ₹0

Explanation

TR = PQ = 1,000Q − 2Q². MR = dTR/dQ = 1,000 − 4Q. At Q = 100, MR = 1,000 − 400 = ₹600... check: 1,000 − 4(100) = 600. The ₹800 figure is the price at Q = 100 (average revenue), a common confusion.

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