Economics Chapter on Revenue and Profit Maximization
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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?

<p>A firm should produce at the output level at which marginal revenue equals marginal cost (MR = MC).</p> Signup and view all the answers

How do we determine whether a firm is generating an economic profit?

<p>If at the profit-maximizing output level, q*, the firm's price is greater than its average total costs.</p> Signup and view all the answers

How do we determine whether a firm is experiencing an economic loss?

<p>If at the profit-maximizing output level, q*, the price is less than the average total cost.</p> Signup and view all the answers

How do we determine whether a firm is making zero economic profits?

<p>If at the profit-maximizing output level, q*, the price is equal to average total cost.</p> Signup and view all the answers

A firm should continue operating if the price is below average variable cost.

<p>False</p> Signup and view all the answers

In perfect competition, at the firm's profit maximizing short run output, which of the following is true?

<p>All of the other statements are true.</p> Signup and view all the answers

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?

<p>Increase output.</p> Signup and view all the answers

What is the marginal revenue of a firm selling grapefruit at $1.50 per pound in a perfectly competitive market?

<p>Equals $1.50.</p> Signup and view all the answers

Total revenue is calculated as ______.

<p>price times the quantity sold</p> Signup and view all the answers

Average revenue is ______ divided by the quantity sold.

<p>total revenue</p> Signup and view all the answers

Marginal revenue results from a change in total revenue and is calculated as ______.

<p>change in TR / change in q</p> Signup and view all the answers

The firm's profit-maximizing output occurs where ______ equals ______.

<p>MR, MC</p> Signup and view all the answers

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!

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