B the marginal revenue of the 16th unit for clive is

$3
6. The demand for saffron is highly elastic. The demand for cigarettes is highly inelastic. The demand for
peanut butter is unit-elastic.
a. If saffron producers reduce the price of saffron, what will happen to total revenue as a result? Will
marginal revenue be positive, zero, or negative?
b. If cigarette makers reduce the price of cigarettes, what will happen to total revenue as a result? Will
marginal revenue be positive, zero, or negative?
c. If peanut butter producers reduce the price of peanut butter, what will happen to total revenue as a
result? Will marginal revenue be positive, zero, or negative?
6. a. The total revenue will increase and the marginal revenue will be positive.
b. The total revenue will decrease and the marginal revenue will be negative.
c. The total revenue will not change and the marginal revenue will be zero.
7. In the chapter, we noted that the marginal revenue a seller receives can be expressed as MR = P
(Δ P /Δ Q ) × Q
a. Using this formula as a starting point, show that marginal revenue can be expressed as MR
P (1 + 1/ E D ), where E D is the price elasticity of demand.
b. Using your knowledge about the price elasticity of demand, explain why the marginal revenue a firm
with market power receives must always be less than the price.
c. Using your knowledge of the price elasticity of demand, explain why the marginal revenue a perfectly
competitive firm receives must be equal to the price.
+
.
=
Goolsbee1e_Solutions_Manual_Ch09.indd 109 Goolsbee1e_Solutions_Manual_Ch09.indd 109 11/15/12 3:09 PM 11/15/12 3:09 PM

110 Part 3 Markets and Prices
Solution
Solution
Q
–
Q
):
–
× P
E
.
.