Asked by Kunwar Singh on Jul 24, 2024
Verified
Describe the difference between average revenue and marginal revenue. Why are both of these revenue measures important to a profit-maximizing firm?
Marginal Revenue
The additional income generated from the sale of one more unit of a good or service.
Average Revenue
The income a business earns from each unit sold, determined by dividing the total income by the total quantity of units sold.
Profit-Maximizing
A company's goal or strategy of adjusting production and sale levels to achieve the highest possible profit under given market conditions.
- Differentiate between average revenue, marginal revenue, and their importance to profit-maximizing firms.
Verified Answer
YZ
Yunze ZhangJul 25, 2024
Final Answer :
Average revenue is total revenue divided by the quantity of output. Marginal revenue is the change in total revenue from the sale of each additional unit of output. Marginal revenue is used to determine the profit-maximizing level of production, and average revenue is used to help determine the level of profits. Note that for all firms, price equals average revenue because AR=(PxQ)/Q=P. But only for a firm operating in a perfectly competitive industry does price also equal marginal revenue.
Learning Objectives
- Differentiate between average revenue, marginal revenue, and their importance to profit-maximizing firms.