Question

Explain the relation between Total Revenue, Average Revenue and Marginal Revenue.

Hint:

The most important relationship for exams is: When \(MR = 0\), TR is maximum. This is the point where the firm has maximized its total sales receipts.

Answer 1

Step 1: Understanding the Concept:
- Total Revenue (TR): Total money received by selling a given quantity (\(P \times Q\)).
- Average Revenue (AR): Revenue per unit of output sold. It is always equal to the Price (\(TR/Q\)).
- Marginal Revenue (MR): Additional revenue generated by selling one extra unit (\(TR_n - TR_{n-1}\)).
Step 2: Detailed Explanation:
The relationship depends on the market condition:
1. Under Perfect Competition (Price Constant):
- AR and MR are equal and constant (\(AR = MR = \text{Price}\)).
- The AR/MR curve is a horizontal line.
- TR increases at a constant rate, represented by a straight line from the origin.
2. Under Imperfect Competition (Price Falls to sell more):
- Both AR and MR decline. MR falls faster than AR (\(AR>MR\)).
- When MR is positive, TR increases (but at a decreasing rate).
- When MR is zero, TR is at its maximum (Peak point).
- When MR becomes negative, TR starts to fall.
Step 3: Final Answer:
In summary, TR is the sum of MR; AR represents the price; and MR determines the slope and direction of the TR curve.