13. The components of marginal revenue
Manuel's Fire Engines is the sole seller of fire engines in the fictional country of Pyrotania. Initially, Manuel produced three fire engines, but he is
considering increasing production to four fire engines. The following graph shows the demand curve Manuel faces. As you can see, to sell the
additional engine, Manuel must lower his price from $45,000 to $15,000 per fire engine. Note that although Manuel would gain revenue from the
additional engine he sells, he would also lose revenue from the initial three engines because he would have to sell them all at the lower price.
Use the purple rectangle (diamond symbols) to shade the area representing the revenue lost from the initial three engines by selling at $15,000 rather
than $45,000. Then use the green rectangle (triangle symbols) to shade the area representing the revenue gained from selling an additional engine at
$15,000.
PRICE (Thousands of dollars per fire engine)
150
135
120
105
90
75
60
45
30
15
0
1
2
3
4
5
6
7
8
9
10
QUANTITY (Fire engines)
Demand
Revenue Lost
Revenue Gained
Manuel
increase production from 3 to 4 fire engines, because the
dominates in this scenario.
True or False: If Manuel's Fire Engines were a competitive firm instead and $45,000 were the market price for an engine, decreasing its price from
$45,000 to $15,000 would result in an increase in production quantity and total revenue.
? True
? False
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