Theory question 109
Theory of Costs and Revenue(a) Define the profit of a firm.
(b) With appropriate formulae, explain the following revenue and cost concepts: (i) total revenue (TR) (ii) average revenue (AR) (iii) marginal revenue (MR) (iv) average fixed cost (AFC).
Show the model answer
Model answer
(a) Profit is the excess of total revenue over total cost (Profit = TR − TC).
(b)(i) Total revenue: total money received from sales; TR = P × Q.
(ii) Average revenue: revenue per unit sold; AR = TR/Q (equal to price).
(iii) Marginal revenue: addition to total revenue from selling one more unit; MR = TRn − TRn−1 = ΔTR/ΔQ.
(iv) Average fixed cost: fixed cost per unit of output; AFC = TFC/Q (falls as output rises).
Explanation
Each definition must have its formula.