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

A monopolist faces a straight-line downward-sloping demand curve. At the output where price elasticity of demand is exactly unitary, which statement is correct?

Marginal revenue is zero and total revenue is at its maximum. Since MR equals price times (1 minus 1/elasticity), unitary elasticity gives MR of zero, so selling more neither raises nor lowers total revenue at that point.

  1. AMarginal revenue is positive and at its maximum
  2. BMarginal revenue is negative and total revenue is falling
  3. CMarginal revenue equals price
  4. DMarginal revenue is zero and total revenue is at its maximumCorrect
  5. Average revenue is zero

Explanation

MR = P(1 − 1/|e|). When |e| = 1, MR = 0. Total revenue stops rising when MR is zero, so TR is at its maximum there. MR equals price only for a price taker.

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