Economical Terms - Average Revenue Assessment Answer

Answer:

Introduction:

Total revenue means the sum total of all the revenues earned and generated by the firm. In mathematical terms, total revenue means the revenue or the price per unit multiplied by the number of units of the product sold. The more the number of units sold, the greater is the revenue generated by the firm.

Average revenue is the average revenue generated by the product, having a pre-determined selling price. In economical terms, Average revenue is calculated by dividing the total revenue by the number of units sold.

Marginal revenue refers to the change in the total revenue of a firm with a change in the unit increase or decrease in the sale of the product. Hence, marginal revenue is computed by the per unit difference in the total revenue of the firm, with a unit increase in the number of units sold.


 

Price

 

Quantity demanded

 

Average revenue

 

Total revenue

 

Marginal revenue

$30

0

$0

$0

–––

30

1

$30

$30

$30

30

2

$30

$60

$30

30

3

$30

$90

$30

 

 

 

 

 

 

Fixed costs are the costs which a firm incurs irrespective of the production carried out by the firm. This implies that the fixed cost occur even if the firm does not generate any revenues or does not carry out any such activities. Fixed cost is a certain fixed amount and it continues to incur at the same amount, irrespective of the quantum of production or sales by the firm.

Variable costs refer to the costs which tend to occur per unit of the level of production. It varies with the quantum of production and are avoidable in nature, i.e., if the firm does not produce any product, it does not have to incur the variable costs. Total variable costs are computed by multiplying the variable cost per unit and the number of products produced.

Total costs can be computed as the aggregate of the fixed costs and the variable costs.

Average fixed costs can be computed by dividing the total fixed costs incurred by the firm during the period divided by the number of units produced by the firm.

Average variable costs can be computed by dividing the total variable costs incurred by the firm during the period divided by the number of units produced by the firm. Average variable costs tend to decrease with the increase in production and it remains stable after a particular level of production. This stability implies the most efficient utilization of the resources.

Average total costs refer to the total costs per unit of the product. It can be mathematically calculated by dividing the total costs by the number of products manufactured by the firm.

Marginal cost refers to the change in the total cost of a firm with a change in the unit increase or decrease in the production or manufacture of the product. Hence, marginal cost is computed by the per unit difference in the total cost of the firm, with a unit increase in the number of units produced.

Total product

total fixed cost

Total variable cost

Total cost

Average fixed cost

Average variable cost

Average total cost

Marginal cost

0

$100

$ 0

$100

–––

–––

–––

–––

1

100

100

$200

$100

$100

$200

$200

2

100

180

$280

$50

$90

$190

$80

3

100

240

$340

$33.33

$80

$113.33

$60

4

100

320

$420

$25

$80

$105

$80

List of References:

Salvatore, D. (2008). Microeconomics- Theory and applications (Fifth ed.)

T.S. Ragan, C. (2013). Microeconomics (Fourteenth ed.). Canada: Pearson Education.

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