in going from 2 to 3 emeralds is (−$9) × 2 =−$18.
That’s because 2 emeralds can only be sold at a price
of $84 when 3 emeralds in total are sold, although they
could have been sold at a price of $93 when only 2 in
total were sold.
Tackle the Test:
Multiple-Choice Questions
- d
- b
- a
- e
- b
Tackle the Test:
Free-Response Questions
S-38 SOLUTIONS TO AP REVIEW QUESTIONS
Q 1 Q 2 Quantity
Price
of unit
S 2
S 1
D
P 1
P 2
Market
q 2 q 1 Quantity
Price,
cost of
unit
ATC
MC
MR 2 = D 2
P 1 MR 1 = D 1
P 2
Firm
Profit
Module 61
Check Your Understanding
- a.The demand schedule is found by determining the price
at which each quantity would be demanded. This price
is the average revenue, found at each output level by
dividing the total revenue by the number of emeralds
produced. For example, the price when 3 emeralds are
produced is $252/3 =$84. The price at the various out-
put levels is then used to construct the demand schedule
in the accompanying table.
b.The marginal revenue schedule is found by calculating
the change in total revenue as output increases by one
unit. For example, the marginal revenue generated by
increasing output from 2 to 3 emeralds is ($252 −
$186) =$66.
c.The quantity effect component of marginal revenue is the
additional revenue generated by selling one more unit of
the good at the market price. For example, as shown in
the accompanying table, at 3 emeralds, the market price
is $84; so, when going from 2 to 3 emeralds the quantity
effect is equal to $84.
d.The price effect component of marginal revenue is
the decline in total revenue caused by the fall in price
when one more unit is sold. For example, as shown
in the table, when only 2 emeralds are sold, each
emerald sells at a price of $93. However, when
Emerald, Inc. sells an additional emerald, the price
must fall by $9 to $84. So the price effect component
Quantity of Quantity
emeralds Price of Total Marginal effect Price effect
demanded emerald revenue revenue component component
1 $100 $100
$86 $93 −$7
2 93 186
66 84 − 18
3 84 252
28 70 − 42
4 70 280
− 30 50 − 80
5 50 250
e.In order to determine Emerald, Inc.’s profit-maximizing
output level, you must know its marginal cost at
each output level. Its profit-maximizing output level
is the one at which marginal revenue is equal to mar-
ginal cost.
- As the accompanying diagram shows, the marginal cost
curve shifts upward to $400. The profit-maximizing price
rises to $700 and quantity falls to 6. Profit falls from
$3,200 to $300 × 6 =$1,800. The quantity a perfectly