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Difficulty: MediumRevenue Concepts and Relationships

A firm operating in an imperfectly competitive market sells 3 units of a commodity at a price of ₦40 per unit. When output increases to 4 units, the unit price drops to ₦35. What is the marginal revenue, in Naira (₦), generated from selling the 4th unit?

Answer: 20 ₦

Answer

The marginal revenue generated from selling the 4th unit is ₦20.
The correct value of ₦20 is obtained by finding the difference between Total Revenue at 4 units (₦140) and Total Revenue at 3 units (₦120).

Step-by-Step Solution

1
Calculate Total Revenue at 3 units (TR3TR_3)
TR3=3×40=120TR_3 = 3 \times 40 = 120
Total Revenue is obtained by multiplying Price by Quantity (TR=P×QTR = P \times Q).
2
Calculate Total Revenue at 4 units (TR4TR_4)
TR4=4×35=140TR_4 = 4 \times 35 = 140
Total Revenue at the increased output level is the new Price multiplied by the new Quantity.
3
Calculate Marginal Revenue (MRMR)
MR4=140−120=20MR_4 = 140 - 120 = 20
Marginal Revenue is the addition to Total Revenue resulting from selling one extra unit (MR=ΔTR/ΔQMR = \Delta TR / \Delta Q).

Key Concept

Calculation of Marginal Revenue from Price and Quantity in Imperfect Competition
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Topics

Revenue Concepts and Relationships

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