Question

This problem gives you a preview of something you might see in a microeconomics class. Suppose there's an appliance store that sells air conditioners. It could set its price high and sell very few air conditioners, or it could set its price low and sell many more air conditioners. The following table shows some possible choices this store could make:

The graph below plots the firm's "total revenue" curve: that is, the relationship between quantity and total revenue given by the two right columns in the table above. The five choices are also labelled. Finally, two black lines are shown; these lines are tangent to the green curve at points B and D.

Using the information on the slope of the lines tangent to the total revenue curve at points B and D, plot the slope of the total revenue curve on the graph below. (As it turns out, it's a straight line, so the two points you plot will determine a line.)

The total revenue curve reaches its maximum at a quantity of 400 air conditioners per year. At this point, the slope of the total revenue curve is equal to zero.

Answer 1

(1) Total revenue (TR) curve is correctly drawn.

(2) Slope of TR curve is Marginal Revenue (MR), where

MR = Change in TR / Change in output (Q)

Between points B & A, MR = $(60,000 - 0) / (200 - 0) = $60,000 / 200 = $300

Between points E & D, MR = $(0 - 60,000) / (800 - 600) = -$60,000 / 200 = -$300

Slope of TR curve is drawn as follows (given graph is wrong).

(3) The TR curve reaches maximum at quantity of 400. At this point, slope of TR is zero.