Question

(a) Explain the difference between average, total, and marginal revenue? What is the shape of the total and marginal revenue curves for the individual perfectly competitive firm? [5marks]

(b) Why does price equal marginal revenue for the perfectly competitive firm? What is the relationship to the demand curve for the firm? [5marks]

(c) Why is the level of output at which marginal revenue equals marginal cost the profitmaximizing output? [5marks]

(d) What conditions are necessary to determine if the purely competitive firm should produce in the short run? State the marginal revenue and marginal cost conditions and the total revenue and total cost conditions.

Answer 1

Ans a total revenue is total earnings from selling product, average revenue is revenue generated per unit of output and marginal revenue is change in revenue resulting from one unit increase in output. Total revenue curve start increasing initially at increasing rate, then increase at decreasing rate and at last falls. Marginal revenue curve slopes upwards upto a point and then falls

2 Because every unit is sold at same price. Here demand curve is horizontal line at a given orice

3 Because before it MR>Mc so that increasing output increases profit and after this point Mc>MR so that reducing output reduces profit

4 price should be greater than minimum point of AVC. MR should be equal to marginal cost and difference between TR and TC should be highest possible