Marginal revenue is simply the revenue from selling one more unit, which at a price of $450 is $450, thus, statement a is true. However, since marginal cost is $300, each additional unit sold at $450 increases profit ($450 revenue - $300 cost = $150 profit per unit), so statement b is also true: marginal revenue is larger than marginal cost, leading to increased profits.
- The student's question pertains to changes in marginal revenue, marginal cost, price, and profit within the context of a potential sales scenario.
- When analyzing whether cutting the price to $450 will increase profits, we need to calculate the marginal revenue from selling the additional 200 units at the new price and compare it to the marginal cost, which remains constant at $300.
- Currently, the revenue is 1,000 customers x $500 = $500,000, while the total cost is 1,000 customers x $300 = $300,000, leading to a profit of $200,000.
- If the price drops to $450 and sales increase to 1,200 customers, the new revenue will be 1,200 customers x $450 = $540,000, resulting in an increase in total profit only if the additional costs do not exceed the additional revenue.
- In this case, the additional cost for 200 extra units is 200 x $300 = $60,000.
- Marginal revenue for the additional 200 units at $450 is simply $450 since it's the additional revenue from selling one more unit.
- Considering this, we find out that statement b is true: Marginal revenue is larger than marginal cost.
- For each of the additional 200 units sold, the company receives $450 but only incurs an additional cost of $300.
- Therefore, each additional unit yields an extra profit of $150 ($450 revenue - $300 cost), which leads to an increase in overall profit.