State the relation between marginal revenue and average revenue.
The average revenue (AR) of a firm is defined as total revenue per unit of output. The marginal revenue (MR) of a firm is defined as the increase in total revenue for a unit increase in the firm’s output
1. Both AC and MC are derived from total cost (TC). AC refers to TC per unit of output and MC refers to addition to TC when one more unit of output is produced.
2. Both AC and MC curves are U-shaped due to the Law of Variable Proportions. The relationship between the two can be better illustrated through following schedule and diagram.
Relationship between AC and MC:
1. When MC is less than AC, AC falls with increase in the output, i.e. till 3 units of output.
2. When MC is equal to AC, i.e. when MC and AC curves intersect each other at point A, AC is constant and at its minimum point.
3. When MC is more than AC, AC rises with increase in output.
4. Thereafter, both AC and MC rise, but MC increases at a faster rate as compared to AC.
As a result, MC curve is steeper as compared to AC curve.
A consumer buys 18 units of a good at a price of Rs. 9 per unit. The price elasticity of demand for the good is (−) 1. How many units the consumer will buy at a price of Rs. 10 per unit? Calculate.
Unemployment is reduced due to the measures taken by the government. State its economic value in the context of production possibilities frontier.
