Question

In: Economics

Use the product rule to explain two different situations where price and marginal revenue can be...

Use the product rule to explain two different situations where price and marginal revenue can be very different

Solutions

Expert Solution

Let us first understand the basic definition of Price and Marginal Revenue.

Price: It is the amount which is charged by any seller from the customer. It may not necessarily remain the same and can changes. For Ex. Price of the Clothes, it reduces as when demand decreases.

Marginal Revenue: It is the value which is seen when an additional unit of a good is sold. For example, If Pen manufacture's fixed cost (plant and machinery & labour) is 1000$ and Variable cost (production time, electricity etc. which is 50$ to make 10pens = 50*10 = 500$. Total value is 10,500$. Here, the average value for each pen is 1500/10 = 150$.

Now, if we make another pen which makes it 11$ pen then the Average value would be 1500$/11$ = 136$.

The marginal revenue would become 150$-136$ = 14$. This means as we try and make 1 additional product, the marginal revenue decreases. you can produce more pens and simply decrease the prices bases on the demand.

These kinds of advantage can be gained only on less competitive market and not highly perfect market.

Monopoly companies would fall under this case.

Apple phone, in this case, would have the liberty to reduce or increase the price since it is a monopoly market. they can increase or decrease the price. It cannot happen in competitive markets.

Thus, if a product/ firm has spent on the variable item which will significantly reduce the total cost and intern make pricing decisions. .  


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