[amp_mcq option1=”MR > 0″ option2=”MR < 0" option3="MR = 0" option4="MR = 1" correct="option3"]
The correct answer is: C. MR = 0.
Marginal revenue (MR) is the additional revenue that a firm earns from selling one more unit of its product. It is calculated by taking the derivative of total revenue (TR) with respect to quantity (Q).
Price elasticity of demand (e) is a measure of how responsive consumers are to changes in price. It is calculated by taking the percentage change in quantity demanded divided by the percentage change in price.
When e = 1, demand is unit elastic. This means that a 1% increase in price will lead to a 1% decrease in quantity demanded. In this case, marginal revenue will be equal to zero.
Here is a diagram that illustrates the relationship between price, marginal revenue, and elasticity of demand:
[Diagram of a demand curve with a price elasticity of demand of 1]
As you can see, when the price elasticity of demand is equal to 1, the demand curve is a straight line. This means that the percentage change in quantity demanded is equal to the percentage change in price. In this case, marginal revenue will be equal to zero.
Here is a brief explanation of each option:
- Option A: MR > 0. This is not possible when e = 1. When e = 1, demand is unit elastic. This means that a 1% increase in price will lead to a 1% decrease in quantity demanded. In this case, marginal revenue will be equal to zero.
- Option B: MR < 0. This is possible when e < 1. When e < 1, demand is inelastic. This means that a 1% increase in price will lead to a less than 1% decrease in quantity demanded. In this case, marginal revenue will be negative.
- Option C: MR = 0. This is possible when e = 1. When e = 1, demand is unit elastic. This means that a 1% increase in price will lead to a 1% decrease in quantity demanded. In this case, marginal revenue will be equal to zero.
- Option D: MR = 1. This is not possible. Marginal revenue can never be greater than price.