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Write any two relationships between price elasticity of demand and marginal revenue.

Write any two relationships between price elasticity of demand and marginal revenue.

Solution

Price elasticity of demand (Ep) and marginal revenue (MR) are linked through the relation MR = AR(1 − 1/Ep), and two relationships that follow are:

  1. Elastic demand (Ep > 1): MR is positive, so a fall in price raises total revenue.
  2. Unitary elastic demand (Ep = 1): MR is zero, so total revenue is at its maximum and stays constant when price changes.

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