Question

Jake's Fire Engines is the sole seller of fire engines in the fictional country of Pyrotania. Initially, Jake produced eight fire engines, but he has decided to increase production to nine fire engines. The following graph shows the demand curve Jake faces. As you can see, to sell the additional engine, Jake must lower his price from $80,000 to $40,000 per fire engine. Note that while Jake gains revenue from the additional engine he sells, he also loses revenue from the initial eight engines because he sells them all at the lower price.

Use the purple rectangle (diamond symbols) to shade the area representing the revenue lost from the initial eight engines by selling at $40,000 rather than $80,000. Then use the green rectangle (triangle symbols) to shade the area representing the revenue gained from selling an additional engine at $40,000.

Revenue LostRevenue Gained012345678910200180160140120100806040200PRICE (Thousands of dollars per fire engine)QUANTITY (Fire engines)Demand

Jake increase production from 8 to 9 fire engines because the dominates in this scenario.

True or False: If Jake's Fire Engines were a competitive firm instead and $80,000 were the market price for an engine, decreasing its price from $80,000 to $40,000 would result in a decrease in the production quantity, but an increase in total revenue.

True

False

Answer 1

Jake's should not increase his production 8 to 9 fir engines because price effect dominatesin this scenario.

False