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Help with Marginal Revenue Equations derived from the demand curve | CIMAsphere
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Help with Marginal Revenue Equations derived from the demand curve
Posted: Saturday 13 August 2011 by Michael Jones Replies : 2 Keyw ords: BPP Study text, help, Marginal Revenue, P2

Hi All, I w onder if I could trouble anyone on a problem I am having w ith a BPP study text question for P2. I must be missing something as I do not understand how BPP have got to this answ er, can you help? At the start of the text I am told the follow ing equation for a demand curve is P=a-bx. P = The Selling Price x = the quantity demanded at that price a = theoretical maximum price, if price is set at a or above demand w ill be zero b = the change in price required to change demand by ONE unit ------------------------------------------------------------------------------------a = $(current price) + ((current quantity at current price/change in quantity to change demand by ONE unit w hen price changed by $b) X $b) b = Change in price/change in quantity. ---------------------------------------------------------------------------------------Here comes the question AB has used market research to determine that if a price of $250 is charged for product G, demand w ill be 12,000 units. It has also been established that demand w ill rise or fall by 5 units for every $1 fall/rise in the selling price. The marginal cost of product G is $80.00 If marginal revenue = a-2bx w hen the selling price (P) = a-bx, calculate the profit maximising selling price for product G. My understanding is that I w ork out (P)250 = a-bx first and then slot in the values for a and b in (MR)80 = a-2bx (Where the profit maximising position is w hen MC = MR). The answ er I get is radically different from that of the book, here is the answ er in the book b = $1 a= $250 + ((12000/5) x $1) = 2650 MR = 2,650 - (2 X 1)x = 2650 - 2x Profits are maximised w hen MC = MR, ie w hen 80 = 2650 - 2x Profit maximising demand is 1,285, therefore Profit maximising price = 1,365 (2650 - 1285) Here are my perhaps misplaced understandings, if anyone can help clear this up I w ould be appreciated Why is it that b=$1, w hen according to rule b should be 1/5 = 0.2 ? Can anyone help me understand this answ er, I do not understand w hy w hen the rule is b = change in price/change in quantity, according to the answ er b = $1.

Thanks in advance for any help!!!!

Thats what i get

Posted by Michael Archibald on Saturday 13 August 2011 13:45

I get the same answ er as that although you are correct in w hat your are saying that b should be 0.2 and not 1. Im not sure how they have came back to that number. The w ay i w as taught, and its been a w hile so correct me if im w rong: Step1 p=a-bx 250=a-0.2 x 12000 a=2650 ----------------step2 p=a-2bx (and mc=mr)

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10/18/13
80=2650-0.4x x=6425 ---------step3 p=a-bx p=2650-0.2x6425 p=1365 w hat answ er do you get?

Help with Marginal Revenue Equations derived from the demand curve | CIMAsphere

cannot find question in book

Posted by Samantha Costello on Sunday 14 August 2011 13:57

but mine is also 1365 Login to post a reply Community guidelines

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