ACCA Performance Management (F5) Certification Practice Exam

How is marginal revenue (MR) calculated?

1. MR = a + bQ

2. MR = a - bQ

3. MR = a - 2bQ

4. MR = 2a - bQ

The correct answer is: MR = a - 2bQ

Marginal revenue (MR) is the additional income received from selling one more unit of a product. It is derived from the total revenue (TR) function, which is typically expressed in a linear form. In a linear demand function, price can be represented as P = a - bQ, where 'a' is the intercept on the price axis, 'b' is the slope of the demand curve, and 'Q' is the quantity sold. Total revenue (TR) can then be calculated as TR = P × Q = (a - bQ) × Q = aQ - bQ^2. To find the marginal revenue, we take the derivative of the total revenue function with respect to quantity (Q). This results in: MR = d(TR)/dQ = d(aQ - bQ^2)/dQ = a - 2bQ. This derivation shows that as quantity increases, the marginal revenue decreases because the slope of the demand curve (which impacts revenue) is negative. Thus, the correct formula for calculating marginal revenue derived from the total revenue function under linear demand conditions is MR = a - 2bQ. This demonstrates the relationship between the price decrease as more units are sold and its impact