Fiona has a monopoly on motorboat rentals on Nantucket Island during the summer. She can rent five boats per week at $21,000 each. If she wants to rent six, she can only charge $20,000 each. The price effect of renting the sixth motorboat is:

Question

Quizplus · Accepted Answer

The price effect is the change in price resulting from a change in quantity demanded. In this case, Fiona's quantity demanded changes from 5 to 6 when she drops the price from $21,000 to $20,000. The price effect is therefore the difference between these two prices, which is -$1,000. However, since Fiona can only rent six boats if she drops the price, the total revenue effect of renting the sixth boat is $20,000 - $1,000 = $19,000. Therefore, the best choice for Fiona is to rent six boats at $20,000 each, even though the price effect is negative.

Fiona Has a Monopoly on Motorboat Rentals on Nantucket Island