Revenue curves

Question 1

Revenue

Answer 1

The total amount of money received from the sale of any given level of output. TR=Price x Quantity sold. TR is at its highest when MR is 0

Question 2

Average revenue

Answer 2

The average receipt per unit sold. AR=TR/Quantity sold

Question 3

Marginal revenue

Answer 3

The receipts from selling an extra unit of output. It is the difference between total revenue at different levels of output. MR=Change in TR/Change in Quantity sold

Question 4

AR and MR

Answer 4

The MR is twice as steep as the AR curve. This is because in order to increase sales to the desired levels, the price must be lowered to attract more buyers. You have to lower all the products to the same price.

Question 5

Plotting AR and MR

Answer 5

Plot AR on the output level and Plot MR halfway between 2 output levels.

Question 6

Imperfect markets

Answer 6

There is a downwards sloping AR curve

Question 7

Perfectly competitive markets

Answer 7

Firms must take its price from the market to make sales.

Question 8

Revenue in a perfect market

Answer 8

The AR and MR are the same curve, The price never changes and therefore the per unit revenue will be the same as the increase in TR. TR will rise at a constant rate and never fall.

Question 9

Positive MR

Answer 9

Whenever MR is positive, TR is increasing so demand is price elastic. This is because the additional output gained is greater than proportional to the revenue lost as price falls so TR continues to rise.

Question 10

Negative MR

Answer 10

Whenever MR is negative, TR will be falling meaning demand is price inelastic. This is because the additional output gained is less than proportional to the revenue lost so TR falls.

Question 11

When MR=0….

Answer 11

TR is at its peak and PED=-1

Question 12

What will be the elasticity of a perfectly competitive market?

Answer 12

PED is perfectly inelastic and any change in price will cause an infinite change in demand. TR will continue to rise and never fall