Question

Define TR, AR and MR. Discuss the relationship between AR and MR.

Answer 1

Total money receipts of a firm from the sale of a given output is called total revenue.

TR = OUTPUT*PRICE

Marginal revenue is the change in total revenue when one more unit of a commodity is sold.

MR= change in TR/change in quantity sold

Average revenue refers to revenue per unit of output.

AR=TR/Q

Relationship between AR and MR:

a) When AR is decreasing, MR should be decreasing faster than AR. Thus, downward sloping MR curve is below the downward sloping AR curve(a situation of monopoly and monopolistic competition)

b) If AR is constant, MR is equal to AR. Both are indicated by the same horizontal straight line(a situation of perfect competition)

c) MR can be negative, but not AR.