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In: Economics

Define total revenue, marginal revenue, and average revenue. Discuss why the demand curve is represented by...

Define total revenue, marginal revenue, and average revenue. Discuss why the demand curve is represented by the marginal revenue curve for a perfectly competitive firm

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Expert Solution

a) Total revenue is total quantity sold at the given price. For example, if the price of a good is $10 and at that price total quantity sold is 100. The total revenue of the firm will be $10 x 100 = $1000.

b) Marginal revenue is the revenue earned by selling an extra unit. For example, If the firm mentioned above is selling 101 units at the same price. The extra revenue the firm earned by selling an extra unit is the marginal revenue. Here, it is $10.

c) Average revenue is total revenue divided by the total quantity sold. Using the same example, when 100 units were sold total revenue was $1000. Average revenue will be $1000 /100 = $10.

d) IN a perfectly competitive market the Marginal revenue curve represents the demand curve because the firm can sell as many units they want at the given price. The curve is perfectly elastic and the firm is a price taker so they match the good sold with the extra revenue earned by selling that unit. making the demand of the good and the revenue earned by the good same.

Rahul Sunny answered 2 years ago
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