Question

If the marginal revenue R_m = 40 and elasticity of demand η is 5, then the average revenue R_A will be ______.

Answer 1

If the marginal revenue R_m = 40 and elasticity of demand η is 5, then the average revenue R_A will be 50.

Explanation:

Given:

Marginal revenue R_m = 40 and

elasticity of demand (η) = 5

R_m = R_A `(1 - 1/η)`

∴ 40 = `R_A (1 - 1/5)` 

∴ R_A = `R_m/(1 - 1/5)`

∴ R_A = `40/(1 - 1/5)`

∴ R_A = `40/(4/5)`

∴ R_A = `40 xx 5/4`

∴ R_A = 50

∴ Average revenue (R_A) = 50