Question

# Use the purple rectangle (diamond symbols) to shade the area representing the revenue lost from the initial five engines by selling at \$120,000 rather than \$160,000.

3. The components of marginal revenue

Raphael's Fire Engines is the sole seller of fire engines in the fictional country of Pyrotania. Initially, Raphael produced five fire engines, but he has decided to increase production to six fire engines. The following graph shows the demand curve Raphael faces. As you can see, to sell the additional engine, Raphael must lower his price from \$160,000 to \$120,000 per fire engine. Note that although Raphael gains revenue from the additional engine he sells, he also loses revenue from the initial five 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 five engines by selling at \$120,000 rather than \$160,000. Then use the green rectangle (triangle symbols) to shade the area representing the revenue gained from selling an additional engine at \$120,000.

Raphael _______  increase production from 5 to 6 fire engines, because revenue gained is _______  than revenue lost in this scenario.

True or False: If Raphael's Fire Engines were a competitive firm instead and \$160,000 were the market price for an engine, decreasing its price from

\$160,000 to \$120,000 would result in an increase in production quantity and total revenue.

•  True

•  False

Represent the graph as given below :

In the above graph, the purple shaded region is the revenue lost and green shaded region is the revenue gained. With the increase in price the quantity as declined.

Raphael's shouldn't increase production from 5 to 6 fire engines, because revenue gained is lower than revenue lost in this scenario.

If Raphael's fire engines were a competitive firm instead and \$160,000 were the market price for an engine, decreasing its price from \$160,000 to \$120,000 would result in an increase in production quantity and total revenue.

Given statement is False.

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