Scenario 10.7:
The marginal revenue of green ink pads is given as follows:
MR = 2500 - 5Q
The marginal cost of green ink pads is 5Q.
-Refer to Scenario 10.7. Suppose that the firm chooses to produce 200 ink pads. At this level of output the demand for ink pads is:

Question

Quizplus · Accepted Answer

To determine the elasticity of demand at an output level of 200 ink pads, we need to calculate the price elasticity of demand. Since the MR equation is given as MR = 2500 - 5Q, the corresponding demand function can be derived as follows:
MR = P * Q + Q * dQ/dP
2500 - 5Q = P * Q + Q * dQ/dP
dQ/dP = (2500 - 5Q) / (Q + P)
At an output level of 200 ink pads,
dQ/dP = (2500 - 5*200)/(200 + P)
If we assume that the price of green ink pads is constant at the profit-maximizing level of output, then we can use the midpoint formula to calculate the price elasticity of demand as:
Elasticity = (dQ/dP) * (P/Q) = [(2500 - 5Q)/(Q + P)] * (P/Q)
Elasticity = [(2500 - 5*200)/(200 + P)] * (P/200)
Elasticity = [(1500)/(200 + P)] * (P/200)
Elasticity = 7.5 / (1 + P/200)
Since the elasticity of demand is a decreasing function of P, it is highest (i.e., most elastic) when P = 0. This corresponds to a demand elasticity of -7.5, which means that demand is elastic at an output level of 200 ink pads. Therefore, the best choice is C because the firm should be able to increase its revenue by reducing the price of ink pads slightly since the demand is elastic.

Scenario 10.7: the Marginal Revenue of Green Ink Pads Is Given as Given