Chapter 61, Problem 7MCQ

To determine

The reason behind a price cut will increase total revenue.

Answer to Problem 7MCQ

(b) Quantity effect is larger than the price effect.

Explanation of Solution

A price cut will lead to an increase in total revenue if the quantity effect is larger than the price effect because in a quantity effect, total revenue increases by the price at which the unit is sold when one more unit is sold, and in a price effect, a monopolist has to cut the market price on all unit sold in order to sell the last unit. Hence, option (b) is correct.

Economics Concept Introduction

The monopolist faces downward demand and marginal revenue curve which means every change in the price level will result in a change in marginal revenue and total revenue. Since the total revenue is the product of price and quantity so any price change will result in a change in quantity and total revenue.