Marginal revenue will be negative if elasticity of demand isa)less tha...
**Explanation:**
Marginal revenue is the change in total revenue that occurs when one additional unit of a product is sold. It is calculated by dividing the change in total revenue by the change in the quantity sold.
In order to understand why marginal revenue will be negative if elasticity of demand is less than one, we need to understand the concept of elasticity of demand.
**Elasticity of Demand:**
Elasticity of demand measures the responsiveness of quantity demanded to a change in price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
Elasticity of demand can be categorized into three types:
1. Elastic demand: If the absolute value of elasticity of demand is greater than 1, then demand is said to be elastic. This means that a change in price will result in a relatively larger change in quantity demanded. For example, if the price of a product increases by 10% and the quantity demanded decreases by 20%, the elasticity of demand would be -2.
2. Inelastic demand: If the absolute value of elasticity of demand is less than 1, then demand is said to be inelastic. This means that a change in price will result in a relatively smaller change in quantity demanded. For example, if the price of a product increases by 10% and the quantity demanded decreases by 5%, the elasticity of demand would be -0.5.
3. Unitary elastic demand: If the absolute value of elasticity of demand is equal to 1, then demand is said to be unitary elastic. This means that a change in price will result in an equal percentage change in quantity demanded. For example, if the price of a product increases by 10% and the quantity demanded decreases by 10%, the elasticity of demand would be -1.
**Impact on Marginal Revenue:**
The relationship between marginal revenue and elasticity of demand can be understood using the following formula:
Marginal Revenue = Price * (1 + 1/Elasticity of Demand)
Since elasticity of demand is a negative value, the marginal revenue will be positive if elasticity of demand is greater than 1 (elastic demand) and negative if elasticity of demand is less than 1 (inelastic demand).
This can be explained as follows:
- When demand is elastic (elasticity of demand > 1), a decrease in price will result in a relatively larger increase in quantity demanded. As a result, the change in total revenue will be positive, leading to a positive marginal revenue.
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Therefore, if the elasticity of demand is less than one, the marginal revenue will be negative. This is because a decrease in price will lead to a decrease in total revenue, resulting in a negative change in total revenue.
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