Nick's Fire Engines is the sole seller of fire engines in the fictional country of Pyrotania. Initially, Nick produced seven fire engines, but he has decided to increase production to eight fire engines. The following graph shows the demand curve Nick faces. As you can see, to sell the additional engine, Nick must lower his price from $100,000 to $50,000 per fire engine. Note that while Nick gains revenue from the additional engine he sells, he also loses revenue from the initial seven engines because he sells them all at the lower price.

Use the purple rectangle (diamond symbols) to shade the area representing the revenue lost from the initial seven engines by selling at $50,000 rather than $100,000. Then use the green rectangle (triangle symbols) to shade the area representing the revenue gained from selling an additional engine at $50,000.

Nick (should/should not) increase production from 7 to 8 fire engines because the (price effect/output effect) dominates in this scenario.

True or False: If Nick's Fire Engines were a competitive firm instead and $100,000 were the market price for an engine, decreasing its price from $100,000 to $50,000 would result in the same change in the production quantity and, thus, total revenue.

True

False

250 225 Revenue Lost 200 175 150 Revenue Gained PRICE (Thousands of dollars per fire engine) 125 Demand 100 75 50 + 25 0 1 2 8 10 3 4 5 7 QUANTITY (Fire engines) 250 225 Revenue Lost 200 175 150 Revenue Gained PRICE (Thousands of dollars per fire engine) 125 Demand 100 75 50 + 25 0 1 2 8 10 3 4 5 7 QUANTITY (Fire engines)