Revenues

Question 1

What is revenue?

Answer 1

Revenues are the income the firm earns from the sale of its good.

TR = P X Q

Question 2

What is marginal revenue?

Answer 2

Marginal revenue is the extra revenue arising from the sale of one or more unit of output.

MR = change in TR / change in Q

Question 3

What is average revenue?

Answer 3

Average revenue is the revenue per unit of output sold.

(P x Q)/Q = P X 1 = P.

Thus, Average revenue is ALWAYS equal to price.

Question 4

What is a “price-taker” firm?

Answer 4

A firm is known as a price-taker when it has no control over the price at which it sells its product

Question 5

What is the relation between P, Q, TR, AR, & MR for a price taker firm?

Answer 5

For a price taker firm, the price remains constant regardless of the quantity produced and sold. This means that TR increases in proportion to how much the quantity increases by. Thus, the rate of change of the total revenue is constant and is equal to the price.

Thus, for a price taker firm as Q increases:

• TR = P X Q
• MR = P
• P = AR
• therefore, P = AR = MR

Question 6

What is a “price-maker” firm?

Answer 6

A firm that has control over the price is known as the “price-maker”

Question 7

What is the relation between P, Q, TR, AR, & MR for a price taker firm?

Answer 7

A price maker firm lowers the price as it sells more output. Thus, by lowering the price, the marginal revenue of the firm will fall at a faster rate than average revenue.

As Q increases:

• TR = P X Q
• P decreases and so TR first increases and then decreases
• MR decreases twice as fast as AR (i.e. decreases twice as fast as price)
• P = AR