6. Marginal Revenue, Marginal Cost, and Profit Maximization

d. describe the phenomenon of diminishing marginal returns;

What is Total Revenue and what is the formula? - Total revenue (TR) is the sum of individual units sold multiplied by their respective prices - \(\sum P_i \times Q_i\)

What is the formula for Average Revenue (AR)? \(\frac{total revenue}{quantity} = \frac{TR}{Q}\)

What is marginal revenue and what is the formula? - Marginal revenue (MR) is the change in revenue from selling one extra unit of output - \(MR = \frac{\Delta T R}{\Delta Q}\)

Why and how does reducing price (and thus increasing sales) impact a firm’s marginal revenue? The lower cost will cause more sales, but since each unit is at a lower price, the marginal revenue (the change in revenue from selling one extra unit of output) will always be less than the price of the good.

What is Total Fixed Cost? The sum of the costs that do not vary with output. They will be incurred as long as a firm continues in business and the assets have alternative uses. Examples of fixed costs include rent, property taxes and insurance premiums.

What is Average Fixed Cost? Total fixed cost divided by the number of units produced. It always declines as output increases.

What is Total Variable Cost? The sum of those costs that rise as output increases. Total variable costs are zero if output is zero. Examples are wages paid to workers and payments for raw materials.

What is Average Variable Cost? The total variable cost divided by the number of units produced.

What is Average Total Cost? - Total cost divided by the number of units produced. It is sometimes called per unit cost. - ATC is high at low levels of output, decreases as output increases (since fixed costs are spread across more units), and then increases as the firm’s maximum capacity is approached (since marginal costs increase).

What is Marginal Cost? The change in total cost required to produce an additional unit of output.