Question

a. When examining the effect of price on demand, which factors are taken as given?

c. What does a firm use for predicting the revenue consequences of alternative output and pricing policy?

d. Do elasticity and slope mean the same thing? Explain.

e. “There is a direct relationship between MR and price elasticity” Discuss!

Answer 1

Answer a : While examing the effect of price on demand ,the other factors are considered as same. The factor which remain constant when we see the effect of price on quantity demanded are:

• Income of the consumer has been remain same.
• Change in the price of substitute goods
• Change in the price of complementary goods
• Taste and preference of the consumer

A b) As we know revenue is the income obtained by the firm through sale of goods and services. It has been useful for predicting that at different price level what is the revenue obtained. The importance of determing different revenue at different point of time are:

• Help in determining price and output level which provides maximum profit.
• To ascertain the limit of income the firm can earn from particular product.

A c) Elasticity and Slope does not mean same thing. Elasticity and Slope are related to each other.

• Elasticity measures the relative change in the price and quantity where as Slope measures the absolute change in the price and quantity.
• Elasticity means how elastic is demand with respect to factor where as Slope means steepness of the curve.
• Elasticity is the reciprocal of the Slope.

A d) The firm Marginal revenue is the additional revenue that the firm has gain from selling additional unit of good sold where as price elasticity is how responsiveness of quantity demand with change in its price.

Relationship is as follows :

• When Marginal revenue is positive than demand is elastic.
• When Marginal revenue is negative than demand is inelastic