Profit Maximisation

Question 1

What is total revenue?

Answer 1

Earned from sales of output - equal to the number of units sold multiplied by market price (TR = P x Q)

Question 2

What is average revenue?

Answer 2

Average revenue earned from the sale of each unit (total revenue / number of units sold) AR = TR / Q = (P x Q)/Q = P

Question 3

Marginal revenue = ?

Answer 3

Change in total revenue arising from a change in output (MR = change in TR / change in Q)

Question 4

How do we find the profit maximum?

Answer 4

When the change in profit arising from the change in quantity is 0 (the point at which the change in revenue is the same as the change in cost)

Question 5

What is a price taker?

Answer 5

A company that is small in relation to the size of the market and doesn’t have control over market activity / setting prices. Must accept market prices and then decide whether to sell more or fewer units based on that benchmark. Marginal revenue is the same as the market price, which is also the same as the average revenue.

Question 6

What is a price maker?

Answer 6

A company that owns a significant market share and influences what is going on - can decide whether to charge higher or lower prices (if higher, will sell fewer and if lower, will sell more). Has influence on the market price

Question 7

For a price setter, is the marginal revenue higher or lower than the market price?

Answer 7

Lower (if the firm has to cut prices to sell an extra unit, it would lose revenue by not selling the item at a higher price). The extra revenue earned from cutting prices and selling other units is always less than the amount of units sold

Question 8

In a demand curve, how does this involve marginal revenue?

Answer 8

At the top of the demand curve, demand is elastic (generating higher revenue as total revenue increases) - the marginal revenue being earned is positive. At the mid point, elasticity = unity and the is no change in revenue from marginal costs. Further down, elasticity is less than one which means that total revenue is decreasing.

Question 9

What does a marginal revenue schedule show?

Answer 9

How much the total revenue will change if and when it cuts prices and sells another unit of output

Question 10

What does the marginal revenue curve show?

Answer 10

Change in total revenue one would earn from the sale of another unit

Question 11

What does a price taker’s demand curve look like?

Answer 11

Horizontal at the prevailing market price

Question 12

What does a price setters demand curve look like?

Answer 12

Faces a downward sloping demand curve (MR is less than P at any output level, bisects the horizontal Q axis between where the demand curve hits the x axis and the 0 corner point of the graph), because the MR is less than P at every output level

Question 13

For a price taker, what is the marginal revenue?

Answer 13

Same as the market price (AR = P = MR)

Question 14

How does a price taker maximise profits?

Answer 14

By expanding production up to the point at which MR = MC (marginal revenue = marginal cost of production)

Question 15

What is profit per unit?

Answer 15

Profit per unit sold (P1 - AC1) q1

Question 16

How do we work out total profits?

Answer 16

Profit per unit x number of units sold (P1 - AC1) q1

Question 17

What are economic profits?

Answer 17

Above normal profits

Question 18

When is it acceptable to produce?

Answer 18

When the extra revenue earned is greater than the costs incurred - until the profit maximisation point is reached on a graph (Q1), it is ok to produce (should not go beyond because the costs would surpass the revenue)

Question 19

What are normal costs?

Answer 19

The minimum return to justify staying in production

Question 20

For price setters, is the marginal revenue more or less than the market price?

Answer 20

Less (from selling more units at lower prices)

Question 21

Total profit = ?

Answer 21

Total revenue - total cost ; change in profit/change in quantity = (change in total revenue/change in quantity) - (change in total cost/change in quantity)