3.3.1 - Revenue

Question 1

Define Revenue Maximisation

Answer 1

Revenue maximisation is an output when marginal revenue = zero (MR=0).

Question 2

Define total revenue

Answer 2

Total revenue (TR) is found by multiplying price (P) by output i.e. number of units sold. Total revenue is maximized when marginal revenue = zero.
- total revenue is the total amount of money received in a time period from a firm’s sales

Question 3

Define average revenue

Answer 3

Total revenue per unit of output = TR/Q
- revenue per unit sold

Question 4

Define marginal revenue

Answer 4

The revenue earned from selling the last unit of output. It is the addition to total revenue each time an extra unit is sold.

Question 5

TR

Answer 5

TR = P X Q

Question 6

MR

Answer 6

MR = CHANGE IN TR/CHANGE IN QUANTITY

Question 7

What is AR equal to

Answer 7

price of product
bc..
AR = TR/Q but since TR = P X Q, AR = P

Question 8

Which firms do and do not have control over price

Answer 8

firm in highly competitive conditions = no control
firm in less competitive conditions = control
(dep on degree of market power)

Question 9

What are two key situations to know

Answer 9

• firm has no control over price and price is constant as output varies
• firm has some degree of control over price and prcie varies with output

Question 10

Price elasticity of demand and its relationship to revenue
concepts

Answer 10

elastic:
- increase in price = decrease TR, decrease price = increase TR
inelastic:
- decrease in price = decrease TR
- increase price = increase TR

Question 11

What is the relationship between AR and demand curve

Answer 11

• price = AR therefore demand curve is the AR curve as it indicates the price that consumers are willing to pay for each quantity sold

Question 12

What is a price taker

Answer 12

a firm that ahs no power to control the price it sells at - they accept the price set by the market
- so demand curve is perfectly elastic - horizontal

Question 13

Why is the demand curve for a price take perfectly elastic

Answer 13

• perfectly elastic = horizontal
• if a firm increases price, then quantity sold drops to zero
• no reason to decrease price bc the same quantity would sell at the original higher price

Question 14

what is total revenue, average revenue and marginal revenue like whne demand curve is perfectly elastic

Answer 14

• price is the same no matter what output level
• so MR = AR bc each extra unit sold brings in the same revenue as all the others
• average revenue is constant (flat demand line) so total revenue is upward sloping bc prices are constant so the more goods sold, the higher the revenue made

Question 15

What is a price maker and what is their demand curve like

Answer 15

• price makers have some power to set the price they sell at and are in imperfect competition
• downward sloping demand curve - as output increases, price must decrease (law of diminshing marginal utility)

Question 16

check MR explanation in pmt booklet and CGP 49!!!!!

Answer 16

VERY IMPORTANT 3.3.3 and

Question 17

when is revenue maximised

Answer 17

when PED = -1
this is point q on the downward sloping demadn curve (midpoint of AR curve)
- here marginal revenue = 0
- left of point Q - demand is elastic so decreasing price leads to increase in total revenue
- right of point Q = demand is price inelastic so falling price causes fall total revenue
- marginal revenue is twice as steep as AR

Question 18

relationship between TR and MR for a price taker

Answer 18

• when MR is negative, demand is inelastic so TR is falling
• when MR is postive, demand is elastic so TR is rising
• MR = 0, TR is maximised as PED = -1 this is unitary elasticity of demand