3.1.5 - Revenue

Question 1

What is the formula for calculating Total Revenue?

Answer 1

Total Revenue = Price x Quantity Sold

Total revenue reflects the income generated from sales at a given output level.

Question 2

How does Total Revenue behave in perfect competition?

(When the Firm is a Price Taker)

Answer 2

• In Perfect Competition, Firms are Price Takers (they canot influence market price).
• Total Revenue (TR) increases linearly as more units are sold.
• The TR curve is an upward-sloping straight line because the price remains constant

Question 3

How does Total Revenue behave in monopoly or oligopoly?

Answer 3

• In Monopoly/oligopoly firms are Price-Makers and face a downward-sloping demand curve.
• To sell more, the must lower the price.
• Thus, TR increases to a Maximum Point, but then falls as marginal revenue becomes negative.

Question 4

In what market structure is a firm considered a price-taker?

Answer 4

Perfect competition

In this structure, firms have no control over the market price.

Question 5

In what market structures do firms act as price-makers?

Answer 5

Monopoly and oligopoly

These firms can influence market prices due to reduced competition.

Question 6

What is the formula for calculating Average Revenue?

Answer 6

AVERAGE REVENUE = TOTAL REVENUE + OUTPUT

Question 7

What does Average Revenue (AR) represent?

Answer 7

The average receipt per unit sold.

Question 8

How is Average Revenue (AR) calculated?

Answer 8

By dividing Total Revenue (TR) by quantity sold.

Question 9

What does the Average Revenue curve represent in a firm’s context?

Answer 9

The firm’s demand curve.

Question 10

In markets where firms are price takers, how does the Average Revenue curve behave?

Answer 10

The AR curve is horizontal, because the price is constant at all output levels.

Question 11

What does a horizontal Average Revenue curve indicate?

(Elasticity-wise)

Answer 11

Perfectly elastic demand for goods.

Question 12

In which market structure does Average Revenue become the price of the good?

Answer 12

Perfect competition.

Question 13

What do the TR curves look like in different market structures?

Answer 13

• Perfect Competition: Upward Linear TR Curve
• Monopoly/Oligopoly: Inverted U-shaped TR curve. TR is maximised when MR = 0.

Question 14

What does the Aggregate Revenue curve look like for a price-maker?

Answer 14

• In monopoly/oligopoly, firms are price makers.
• The AR curve is** downward-sloping** because the firm must lower the price to sell more.
• This reflects normal downward-sloping demand.

Question 15

Why is the average revenue (AR) curve also the demand curve?

Answer 15

• The AR curve represents the price consumers are willing to pay for each unit.
• Since the price corresponds to quantity demanded, the AR curve is the same as the demand curve.
• Thus in Cost/Revenue Diagrams, D=AR

Question 16

What is marginal revenue (MR)?

Answer 16

Marginal revenue is the extra revenue a firm earns from selling one additional unit.

Question 17

When MR is positive, total revenue is __________.

Answer 17

Increasing

Question 18

When MR is zero, total revenue is ___________.

Answer 18

Maximised

Question 19

When MR is Negative, total revenue is ________.

Answer 19

Falling

Question 20

Why can Marginal Revenue become Negative?

Answer 20

• When the price is lowered to sell more units, it applies to all previous units as well.
• The lost revenue from all those earlier units can exceed the gain from the extra unit, causing MR to be negative.

Question 21

Why is the Marginal Revenue Curve Steeper than the Average Revenue Curve?

Answer 21

• Each price cut affects every unit sold, not just the additional one.
• Once average revenue begins to fall, marginal revenue falls faster and eventually becomes negative.