3. The components of marginal revenue
Asim's HookNLadder is the only company selling fire engines in the fictional country of Alexandrina. Asim initially produced four trucks, but then
decided to increase production to five trucks. The following graph gives the demand curve faced by Asim's HookNLadder. As the graph shows, in order
to sell the additional fire truck, Asim must lower the price from $105,000 to $90,000 per truck. Notice that Asim gains revenue from the sale of the
additional engine, but at the same time, he loses revenue from the initial four engines because they are all sold at the lower price.
Use the purple rectangle (diamond symbols) to shade the area representing the revenue lost from the initial four engines by selling at $90,000 rather
than $105,000. Then use the green rectangle (triangle symbols) to shade the area representing the revenue gained from selling an additional engine
at $90,000.
PRICE (Thousands of dollars per fire engine)
165
150
135
120
105
90
75
60
45
30
15
0
0 1 2 3 4 5 6 7 8 9 10
QUANTITY (Fire engines)
Revenue Lost
Revenue Gained
Asim $\blacktriangle$ increase production from 4 to 5 fire engines because the $\blacktriangledown$ dominates in this scenario.
True or False: If alternatively Asim's HookNLadder were a competitive firm and $105,000 were the market price for an engine, decreasing its price
from $105,000 to $90,000 would result in the same change in the production quantity and, thus, total revenue.
O True
O False
