Reference no: EM132047385

The components of marginal revenue

Sean's Fire Engines is the sole seller of fire engines in the fictional country of Pyrotania. Initially, Sean produced four fire engines, but he has decided to increase production to five fire engines.

The following graph shows the demand curve Sean faces. As you can see, to sell the additional engine, Sean must lower his price from $105,000 to $90,000 per fire engine.

Note that although Sean gains revenue from the additional engine he sells, he also loses revenue from the initial four engines because he sells them all at the lower price.

Use the purple rectangle (diamond symbols) to shade the area representing the revenue lost from the initial four engines by selling at $90,000 rather than $105,000. Then use the green rectangle (triangle symbols) to shade the area representing the revenue gained from selling an additional engine at $90,000.

Sean (2) _____(Should or Should Not) increase production from 4 to 5 fire engines because the (3) _____(Output Effect or Price Effect) dominates in this scenario.

(4) True or False: If Sean's Fire Engines were a competitive firm instead and $105,000 were the market price for an engine, decreasing its price from $105,000 to $90,000 would result in the same change in the production quantity and, thus, total revenue.