Principles of Microeconomics / Unit 8 MIC 0713 worked example, 60 to 90 seconds
Building a Marginal Revenue Column
The idea
From a demand schedule, compute total revenue at each quantity, price times quantity. Marginal revenue between two rows is the change in total revenue. Write it between the rows. Then read the column: marginal revenue starts at the highest price, falls faster than price, reaches zero where total revenue peaks, and goes negative beyond. Mark the quantity where it crosses zero, because no firm with any cost at all produces past it.
In practice
Worked example: the medicine sells one thousand doses at eleven dollars, two at ten, three at nine, four at eight, five at seven, six at six, seven at five, eight at four. Total revenue in thousands runs eleven, twenty, twenty-seven, thirty-two, thirty-five, thirty-six, thirty-five, thirty-two. Marginal revenue per dose for each added thousand runs eleven, nine, seven, five, three, one, minus one, minus three. Revenue peaks at six thousand doses, where marginal revenue passes through zero.
Where people slip
The error is to take the new price as the marginal revenue: the third thousand sells at nine dollars but adds only seven, because the first two thousand lost a dollar each. Marginal revenue equals price only for a price taker.
Your place on the trail
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