Theory question 107
Theory of Costs and RevenueSection B (answer four questions only from this section)
Distinguish between: (a) Fixed Cost and Variable Cost; (b) Marginal Cost and Marginal Revenue; (c) Total Cost and Total Revenue; (d) Average Cost and Average Revenue.
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(a) Fixed cost does not change with output and is paid even at zero output (e.g. rent, insurance); variable cost changes with output (e.g. raw materials, wages of casual labour).
(b) Marginal cost is the addition to total cost from producing one more unit (MC = TCn − TCn−1); marginal revenue is the addition to total revenue from selling one more unit (MR = TRn − TRn−1).
(c) Total cost is the whole cost of producing a given output (TFC + TVC); total revenue is the whole amount received from selling the output (price × quantity).
(d) Average cost is cost per unit (TC ÷ output); average revenue is revenue per unit (TR ÷ quantity), which equals price.
Define both terms in each pair and give a formula or example.