Questions and Answers
What is total revenue?
Total revenue is price times the quantity sold (TR = P x q).
What is average revenue?
Average revenue is total revenue divided by the quantity sold (AR = TR / q).
What is marginal revenue?
Marginal revenue is the change in total revenue from the sale of an additional unit of output (MR = change in TR / change in q).
What is the profit-maximizing level of output?
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How do we determine whether a firm is generating an economic profit?
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How do we determine whether a firm is experiencing an economic loss?
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How do we determine whether a firm is making zero economic profits?
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A firm should continue operating if the price is below average variable cost.
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In perfect competition, at the firm's profit maximizing short run output, which of the following is true?
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Assuming a perfectly competitive firm sells its output for $250 per unit, what should it do if its current marginal cost is $180 and increasing?
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What is the marginal revenue of a firm selling grapefruit at $1.50 per pound in a perfectly competitive market?
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Total revenue is calculated as ______.
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Average revenue is ______ divided by the quantity sold.
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Marginal revenue results from a change in total revenue and is calculated as ______.
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The firm's profit-maximizing output occurs where ______ equals ______.
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Study Notes
Revenue Concepts
- Total Revenue (TR) is calculated as the product of price (P) and quantity sold (q): TR = P x q.
- Average Revenue (AR) is determined by dividing total revenue by the quantity sold: AR = TR / q. In a perfectly competitive market, AR equals the price.
- Marginal Revenue (MR) represents the change in total revenue when one more unit is sold, calculated as MR = change in TR / change in q. In perfect competition, MR equals AR and the market price.
Profit Maximization
- To maximize profits, firms should produce at the output level where Marginal Revenue (MR) equals Marginal Cost (MC).
- If MR exceeds MC, it is beneficial to increase production as additional units contribute more to revenue than to costs.
- Conversely, if MR is less than MC, firms should reduce output to avoid losses.
Cost Analysis
- Economic profit occurs when price at the profit-maximizing output exceeds average total cost.
- Economic loss is present when price is less than average total cost at the profit-maximizing output.
- Zero economic profit exists when price equals average total cost, covering all costs, including opportunity costs.
Market Behavior
- A firm should shut down in the short run if the price falls below average variable cost, as operating would incur greater losses than not producing.
- The short-run supply curve consists of the portion of the MC curve that is above the average variable cost curve.
- The short-run market supply curve is the horizontal summation of individual firms' supply curves.
Competitive Market Characteristics
- In a perfectly competitive market, firms can earn economic profits or incur losses at the profit-maximizing output.
- At this output, three conditions hold true: MR equals MC, price equals MC, and average revenue equals marginal revenue.
- A perfectly competitive firm selling at $250 per unit with a marginal cost of $180 and average variable cost of $160 should increase output to maximize profits, as the marginal revenue exceeds marginal cost.
Specific Market Cases
- With a price of $1.50 per pound for grapefruit in a perfectly competitive market, the marginal revenue equals the price due to the market characteristics of perfect competition.
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Description
This quiz covers essential concepts of total revenue, average revenue, and marginal revenue, emphasizing their significance in profit maximization. Additionally, it explores the conditions under which firms should adjust their output based on marginal costs and economic profits or losses. Test your understanding of these crucial economic principles!
