1Cademy - Deriving the Relationship Between Marginal Revenue and Price Elasticity of Demand

Learn Before

Algebraic Derivation of the Marginal Revenue Formula

Deriving the Relationship Between Marginal Revenue and Price Elasticity of Demand

A direct relationship between marginal revenue (MR) and the price elasticity of demand (ε) is established through a specific derivation. This process involves taking the expression for marginal revenue, derived using the product rule, and rewriting it by substituting the formula for price elasticity, expressed as $\epsilon = -\frac{f(Q)}{Qf'(Q)}$ . The derivation also relies on using the inverse demand function, $P=f(Q)$ , to represent the price. For further reading on the connection between marginal revenue and elasticity, refer to Section 6.4 of 'Mathematics for Economists: An Introductory Textbook' by Malcolm Pemberton and Nicholas Rau.

10 days ago

Contributors are:

Who are from:

References

CORE Econ - The Economy 2.0: Microeconomics

Learn After

The Sign of Marginal Revenue based on Price Elasticity of Demand
A student is deriving the relationship between marginal revenue (MR) and price elasticity of demand (ε), starting from the total revenue function R = P × Q. Analyze the student's derivation below and identify the step containing a mathematical or conceptual error.

Step 1: Find marginal revenue by taking the derivative of total revenue with respect to quantity (Q) using the product rule. MR = dR/dQ = P + Q × (dP/dQ)

Step 2: Factor out Price (P) from the right side of the equation. MR = P × [1 + (Q/P) × (dP/dQ)]

Step 3: Identify the relationship between the term in the parentheses and price elasticity of demand (ε). Recognize that by definition, ε = (P/Q) × (dQ/dP), therefore its reciprocal is (Q/P) × (dP/dQ) = 1/ε.

Step 4: Substitute the elasticity term into the equation from Step 2. MR = P × [1 + 1/ε]
A key relationship in microeconomics connects a firm's marginal revenue (MR) to the price elasticity of demand (ε). Arrange the following steps to show the correct logical sequence for deriving this relationship, starting from the definition of total revenue (R).
Evaluating Competing Marginal Revenue Formulas
Justifying the Key Step in the MR-Elasticity Derivation
A firm is analyzing its pricing strategy and wants to understand the relationship between its marginal revenue (MR) and the price elasticity of demand (ε). Starting with the marginal revenue expression derived from the product rule, MR = P + Q(dP/dQ), which of the following algebraic manipulations is the crucial next step to reformulate this expression into the standard formula that links marginal revenue to price elasticity?
In the process of deriving the formula that links marginal revenue to price elasticity of demand, the expression (Q/P) * (dP/dQ), which arises after applying the product rule and factoring out price, is mathematically equivalent to the price elasticity of demand (ε).
A microeconomist is deriving the formula that connects marginal revenue (MR) to the price elasticity of demand (ε). Match each mathematical step in the derivation with its corresponding conceptual or procedural justification.
Deriving the Marginal Revenue and Elasticity Formula
In the derivation of the relationship between marginal revenue and price, we begin with the expression MR = P + Q(dP/dQ). This equation can be algebraically restructured into a factored form that isolates the price variable (P). Complete the following identity by providing the correct mathematical expression for the blank space:

MR = P * [1 + ________]
Adapting the Revenue Derivation for Marketing Expenditure

Learn Before

Related

Learn After