Question

If elasticity is equal to 3 and Average Revenue is Rs. 30, then Marginal Revenue will be

• A. Rs. 20
• B. Rs. 30
• C. Rs. 10
• D. Rs. 90

Hint:

This formula is essential for microeconomics, especially in market structure analysis. Remember that when demand is elastic (\(e > 1\)), MR is positive. When demand is unit elastic (\(e = 1\)), MR is zero. And when demand is inelastic (\(e < 1\)), MR is negative.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
This question requires the application of the relationship between Average Revenue (AR), Marginal Revenue (MR), and the price elasticity of demand (\(e\)). Average Revenue is the same as the price of the good (\(AR = P\)).

Step 2: Key Formula or Approach:
The relationship between MR, AR, and elasticity of demand is given by the formula: \[ MR = AR \left( 1 - \frac{1}{e} \right) \] where \(e\) is the price elasticity of demand.

Step 3: Detailed Explanation:
We are given the following values: \begin{itemize} \item Price elasticity of demand, \(e = 3\). \item Average Revenue, \(AR = \text{Rs. } 30\). \end{itemize} Substitute these values into the formula: \[ MR = 30 \left( 1 - \frac{1}{3} \right) \] First, solve the expression inside the parenthesis: \[ 1 - \frac{1}{3} = \frac{3}{3} - \frac{1}{3} = \frac{2}{3} \] Now, multiply this by the Average Revenue: \[ MR = 30 \times \frac{2}{3} \] \[ MR = \frac{60}{3} = 20 \] Thus, the Marginal Revenue will be Rs. 20.

Step 4: Final Answer:
The Marginal Revenue will be Rs. 20.