Explain the relation between marginal revenue and average revenue when a firm is able to sell more quantity of output :
(i) at the same price.
(ii) only by lowering the price.
OR
Explain the effect of the following on the supply of a commodity :
(a) Fall in the prices of factor inputs.
(b) Rise in the prices of other commodities.
Explain the relation between marginal revenue and average revenue when a firm is able to sell more quantity of output :
(i) at the same price.
(ii) only by lowering the price.
OR
Explain the effect of the following on the supply of a commodity :
(a) Fall in the prices of factor inputs.
(b) Rise in the prices of other commodities.
(i) Price is constant. As price means average revenue, so average revenue is also constant. Average revenue is constant only when marginal revenue is equal to average revenue. Thus, when a firm is able to sell more quantity of output at the same price marginal revenue is equal to average revenue.
(ii) If more can be sold only by lowering the price, it means that average revenue falls as more is sold. Average revenue falls only when marginal revenue is less than average revenue. Thus, when a firm is able to sell more quantity by lowering the price, marginal revenue will be less than the average revenue.
OR
(i) When the prices of factor inputs decrease, the cost of production decreases. Thus, it becomes more profitable to produce the commodity and so its supply will increase.
(ii) When the prices of other goods rise, it becomes relatively more profitable to produce these goods in comparison to the given good. This results in diversion of resources from the production of given good to other goods. So, the supply of the given good decreases.
(i) Price is constant. As price means average revenue, so average revenue is also constant. Average revenue is constant only when marginal revenue is equal to average revenue. Thus, when a firm is able to sell more quantity of output at the same price marginal revenue is equal to average revenue.
(ii) If more can be sold only by lowering the price, it means that average revenue falls as more is sold. Average revenue falls only when marginal revenue is less than average revenue. Thus, when a firm is able to sell more quantity by lowering the price, marginal revenue will be less than the average revenue.
OR
(i) When the prices of factor inputs decrease, the cost of production decreases. Thus, it becomes more profitable to produce the commodity and so its supply will increase.
(ii) When the prices of other goods rise, it becomes relatively more profitable to produce these goods in comparison to the given good. This results in diversion of resources from the production of given good to other goods. So, the supply of the given good decreases.
