Assume the price elasticity of demand for a good is -3.In this case,a decrease in price would result in marginal revenue of (2/3)P.

Question

Quizplus · Accepted Answer

If the price elasticity of demand for a good is -3, this means that a 1% decrease in price will result in a 3% increase in quantity demanded. Therefore, the percentage change in quantity demanded will be larger than the percentage change in price, and the marginal revenue will be positive. Specifically, the formula for marginal revenue is MR = P(1 + 1/|E|), where MR is marginal revenue, P is price, and |E| is the absolute value of the price elasticity of demand. Plugging in the values given, we get MR = P(1 + 1/|-3|) = P(1 + 1/3) = (4/3)P. However, the question asks for marginal revenue as a fraction of price, which is (4/3)P divided by P, or 4/3. Simplifying, this is equal to 1 + 1/3, or 2/3. Therefore, the answer is A, true.

Assume the Price Elasticity of Demand for a Good Is