Lpme2 Hints for Unit 9 Assignment

Price effect is the difference in revenue caused by changing the price on existing

customers.

Quantity effect is the difference in revenue caused by a change in the total number of

customers

Using a bakery example, assume you are selling pies and you have 50 customers a

week and they pay $10.00 per pie for a total revenue of $500.

You figure that if you lower your price to $8 per pie that you will sell more, so you lower

your price. The next week you have 70 customers, each paying $8 per pie, and giving

you a total revenue of $560. You gained $60 on that change in price.

The original 50 customers now paying $8 each give you revenue of $400. The price

effect is a loss of $100 ($500 the 50 were paying last week, minus the $400 that those

same 50 customers are now paying this week = $100 PRICE effect loss).

The 20 NEW customers are paying $8 each giving you an additional $160 in revenue

from new customers; we call that $160 of new customer revenue the QUANTITY effect

gain in revenue.

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Total Revenue = Number of sales multiplied by the price

Marginal Revenue at each price = Total revenue at the price minus the total revenue at

the previous price for the last SINGLE sale (must divide difference in total cost by the

number of units sold at that price).

Quantity produced = the quantity at which the Marginal COST is equal to the Marginal

REVENUE

Monopoly price (with NO government intervention) = HIGHEST price at which buyers

will buy the SAME quantity produced (see the demand schedule/curve) when Marginal

Cost is equal to Marginal Revenue.

Monopoly profits are maximized at a quantity at which marginal cost is equal to

marginal revenue.

Monopoly profits exist when the price is ABOVE the Average Total cost for that quantity.

Monopoly Deadweight loss occurs because the monopoly quantity produced is LESS

than the quantity that would be what consumers would demand at a PRICE that equals

Marginal Cost.

If a price ceiling is imposed on a monopoly and the price ceiling is equal to, or above,

the Average Total Cost for the quantity at which PRICE equals the Demand

schedule/curve, then the monopolist will continue to produce. Any price ceiling below

Average Total Cost will result in shutdown over the long run.

The area of a triangle is computed by the formula:

(base * height)/2

where Height = high price – low price

and Base = high quantity – low quantity