Question

Marvin’s Motors is a monopoly provider of automotive service in the small town of Nowhere. When Marvin reduces his price for oil changes from $25 to $20, he sells 10 additional oil changes per month and his total revenue increases by $40. Which of the following statements is correct?

(A) the output effect is stronger than the price effect
(B) the price effect is stronger than the output effect
(C) Marvin's price is equal to his marginal revenue
(D) Marvin's cost of providing oil changes must have increased

Answer 1

The correct answer is (A) the output effect is stronger than the price effect

Step-by-step explanation

The price elasticity determines which effect is stronger.

In this case,

Marvin reduces his price from $25 to $20, the quantity sold increase and total revenue increase by $40.

As the revenue increase when price goes down, we can say we have a elastic demand. Also, if we have an increase of revenue, that means that the output effect is stronger than the price effect