3.3 Revenues, costs & profits

Question 1

What is law of diminishing returns

Answer 1

In the short run, when variable FoP (labour) are added to a stock of fixed FoP (capital), total marginal product will initially rise then fall.
This is because a firm will reach a point where it has a disproportionate quantity of labour to capital and so the marginal product of labour will fall, thus raising marginal costs.

Question 2

Equation and definition of marginal revenue

Answer 2

MR= ∆ in TR / ∆ in Q
An addition to revenue of selling an additional unit of output

Question 3

Equation for average revenue

Answer 3

AR= TR/Q = QXP/ Q = AR=P

represents D curve

Question 4

Equation and definintion of total revenue

Answer 4

TR= quantity x price
Income a firm derives from selling a given quantity of a G/S at a particular price

Question 5

Explain the revenue curve in perfect competition

Answer 5

• Perfectly elastic demand so AR=MR=D given revenue recieved by the firm for a G/S is constant
• TR = upward sloping as P’s are constant & so the more G/S sold= higher revenues made

Each firm can sell all of its output at the current market price

Question 6

Perfect competition characteristics

Answer 6

• Many buyers and sellers (infinite)
• Homogenous goods = price takers
• No barriers to entry or exit
• Perfect infomation

Question 7

Explain the revenue curve in imperfect competition

Answer 7

• Downward sloping D curve
• TR is maximised when MR=0
• Price falls as output increases
• When MR>0: each additional unit sold adds to TR
• After this point= negative MR so TR falls

Question 8

Elasticity of curved is linked to MR so if MR is postive, negative or 0 what happens?

Answer 8

• Positive: ↓P and ↑ output = D curve is elastic
  Up until output Q, D curve = Elastic
• Negative: TR ↓ as P↓ or Q ↑ so after point Q, D curve = Inelastic
• MR=0: TR is maximised, D curve= unitary elastic at point Q so PED=1

Question 9

Imperfect competition characteristics

Answer 9

• Few buyers and sellers
• Differentiated G/S= price makers
• High barriers to entry or exit
• Imperfect infomation

Question 10

Why does average fixed costs decrease when marginal costs are greater than average costs (MC>AC)

Answer 10

Fixed costs decrease as they are spread out over a larger output

Question 11

Formula for profit

Answer 11

Profit = Total revenue - Total costs

Question 12

Explain the difference between variable costs and fixed costs

Answer 12

• Fixed costs= remain the same as output increases or decrease
• Variable costs= Vary directly with output

Question 13

3 marks

Explain one condition under which loss-making firms might continue to operate in the short run

Answer 13

• Short run shut down point where AR=AVC
• AR>AVC in short run so continues to operate at loss
• But each additional unit sold contributes to reducing the size of the losses