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Question

# Explain the relationship between Marginal Revenue (MR) and Total Revenue (TR).

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Solution

## Total Revenue- The Total Revenue of a firm is the amount received from the sale of the output. Therefore, the total revenue depends on the price per unit of output and the number of units sold. Hence, we haveTR = Q x PWhere,TR – Total RevenueQ – Quantity of sale (units sold)P – Price per unit of outputMarginal Revenue- Marginal Revenue is the amount of money that a firm receives from the sale of an additional unit. In other words, it is the additional revenue that a firm receives when an additional unit is sold. Hence, we haveMR = TRn – TRn-1OrMR=ΔTR/ΔQWhere,MR – Marginal RevenueΔTR – Change in the Total revenueΔQ – Change in the units soldTRn – Total Revenue of n unitsTRn-1 – Total Revenue of n-1 unitsThe relationship between Marginal Revenue and Total Revenue is as follows:1. As long as MR is positive, TR increases 2. When MR is zero, TR is at its maximum point 3. TR falls when MR is negative.

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