Question

2. Calculating marginal revenue from a linear demand curve
Graph the following information and calculate the total revenue for each outcome, and afterward plot the results of each total revenue on a graph:
1.
Quantity Demanded
(Units)
0

Demand Price
(Dollars per unit)
100.00

2.
Quantity Demanded
(Units)
10

Demand Price
(Dollars per unit)
80.00

3.
Quantity Demanded
(Units)
20

Demand Price
(Dollars per unit)
60.00

4.
Quantity Demanded
(Units)
25

Demand Price
(Dollars per unit)
50.00

5.
Quantity Demanded
(Units)
30

Demand Price
(Dollars per unit)
40.00

6.
Quantity Demanded
(Units)
40

Demand Price
(Dollars per unit)
20.00

7.
Quantity Demanded
(Units)
50

Demand Price
(Dollars per unit)

Answer 1

Linear Demand curve

The linear demand curve is downward sloping with maximum quantity demanded being 50 units at a price of $10.

Total Revenue (TR) and Marginal Revenue (MR) schedule

Total revenue is obtained by the multiplication of the quantity demanded (Q) and the Price (P).

i.e.

$TR = Q \times P$

The marginal revenue (MR) is obtained by the differentiation of the total revenue (TR) as a result of an addition of an extra unit of output.

$MR = \varDelta TR / \varDelta Q$

Total Revenue Graph

The total revenue (TR) increases at an increasing rate upto the quantity demanded of 25 units, levels out and then decreases at a decreasing rate. The decline in the total revenue is due to the law of diminishing returns arising from full employment of resources leading to a decline in the marginal output of every extra unit produced.