Question

True or False: If Kevin's Fire Engines were a competitive firm instead and $80,000 were the market price for an engine, decreasing its price from $80,000 to $60,000 would result in the same change in the production quantity and, thus, total revenue.

Answer 1

Answer:

The statement given in the question is True.

Explanation:

In a perfectly competitive market structure,if Kevin's Fire Engine reduces the price of an engine from $80,000 to $60,000 the Marginal Revenue(MR) obtained from selling an engine would also drop from $80,000 to $60,000.Now,MR ideally represents the change in Total Revenue(TR) due to the sale of one more unit of any output or additional revenue obtained by the firm from selling 1 more unit of output.Since,the output price and MR are same in the competitive market,any change in price would be same as the change in MR and by definition of MR,the TR will also change in the same amount or proportion.Therefore, a price decrease from $80,000 to $60,000 per engine would result in a $20,000 reduction in MR for per engine sold and the same change will be reflected in TR of Kevin's Fire Engine as well.