Revenues, Costs and Profits

Question 1

How is total revenue calculated?

Answer 1

• price x quantity sold = total revenue

(Revenue achieved from the sale of a given level of output)

Question 2

What is marginal revenue (MR)?

Answer 2

Marginal revenue is the extra revenue a firm earns from the sale of one extra unit. When marginal revenue is 0, total revenue is maximised.

Question 3

How is marginal revenue calculated?

Answer 3

Change in total revenue / change in quantity

Question 4

Where on the revenue diagram is MR = 0?

Answer 4

• Directly below midpoint of the AR curve
• where demand curve has PED = 1
• if prices rise/ fall around this point, TR would fall

Question 5

What is Average Revenue (AR)

Answer 5

Average Revenue is the average receipt per unit.

Question 6

How is Average Revenue calculated?

Answer 6

TR / Quantity sold = average revenue

Question 7

What is AR curve on the graph represent?

Answer 7

Represents the firms demand curve (average revenue curve is the price of the good)

Question 8

Describe the the AR curve when firms are price takers?

Answer 8

• the AR curve is horizontal
• shows perfectly elastic demand for their goods

Question 9

Describe the AR curve when firms are price makers?

Answer 9

• AR curve is downward sloping a