When marginal revenue is less than zero

Question

When marginal revenue is less than zero
A) the firm cannot be maximizing profits.
B) total revenue is declining with increases in output.
C) demand is inelastic.
D) decreases in output will increase total revenue.
E) All of the above

Answer 1

RIGHT ANSWER = E) All of the above

A) is true since profit maximization occurs where marginal revenue is equal to marginal costs. Marginal costs are not going to be negative, whenever you increase output your costs would also increase since you are using more resources. Therefore, marginal costs cannot equal marginal revenue when marginal revenue is less than zero and the firm cannot maximize profits.

B) is true because marginal revenue is the additional revenue you get from producing an additional output. If it is less than zero, that means you are losing revenue with each additional output. Thus, total revenue (the addition of all the marginal revenues) would be declining as output increases when MR < 0.

C) is correct and can be proven by the total revenue test. When MR < 0 the additional revenue is negative, and so total revenue is decreasing as we lower the price to sell additional output.

D) is true since it is saying what B is saying but the opposite way. If TR decreases with additional output then TR must increase with decreasing output.