Scenario: Tobac Co. is a monopolist in the cigarette market in Nicotiana Republic, where the U.S. dollar is used as the official currency. The firm faces the demand curve shown below. The firm has a constant marginal cost of $2.00 per pack. The fixed cost of the firm is $50 million. To answer the questions below, it is useful to know that the equation of the (inverse) demand curve is P = 8 - 0.04Q, where Q is the quantity demanded (in millions of packs) and P is the price per pack (in $). Also, you should draw in the marginal revenue curve.

-Refer to the scenario above.When the quantity sold goes up from 50 million to 100 million packs of cigarettes,the price effect on the firm's revenue is ________ and the quantity effect is ________.

Question

Scenario: Tobac Co. is a monopolist in the cigarette market in Nicotiana Republic, where the U.S. dollar is used as the official currency. The firm faces the demand curve shown below. The firm has a constant marginal cost of $2.00 per pack. The fixed cost of the firm is $50 million. To answer the questions below, it is useful to know that the equation of the (inverse) demand curve is P = 8 - 0.04Q, where Q is the quantity demanded (in millions of packs) and P is the price per pack (in $). Also, you should draw in the marginal revenue curve.
 
-Refer to the scenario above.When the quantity sold goes up from 50 million to 100 million packs of cigarettes,the price effect on the firm's revenue is ________ and the quantity effect is ________.

Quizplus · Accepted Answer

The price effect refers to the change in revenue due to the change in price, holding the quantity constant. In this case, if the price decreases, it would typically lead to a decrease in revenue per unit, which is the negative effect. The quantity effect refers to the change in revenue due to the change in quantity sold, holding the price constant. Selling more units (from 50 million to 100 million) would increase the revenue, assuming the price per unit remains constant. Therefore, the quantity effect is positive, indicating an increase in revenue due to more units sold. The specific values (-$100 million for the price effect and $200 million for the quantity effect) would depend on the specific prices and quantities involved, but the general principle is that a decrease in price can lead to a decrease in revenue per unit (negative price effect), while selling more units increases total revenue (positive quantity effect).