Theory of Producers Behaviour and Supply Important Questions for Class 12 Economics,Concept of Revenue
1.Revenue It refers to money receipts of the producer from the sale of his output,
2.Total Revenue (TR) It is the total money receipts of a producer on account of the sale of his total output. It can be calculated by multiplying the units of the sales with the price.
Where, TR = Total Revenue, AR = Average Revenue Q = Quantity, P = Price MR = Marginal Revenue
3.Average Revenue (AR) It refers to revenue received per unit of output sold, It is the same as price of the commodity.
Where, P = Price of the commodity
4.Marginal Revenue (MR
) It is the change in Total Revenue on account of the sales of an additional unit of output.
Note Negative Marginal Reveuve is possible only when price is declining under imperfect competition such as monopoly and monopolistic competition. It is not possible in case of perfect competition, where price remains constant for a firm
5.Relationship between Total Revenue (TR) and Marginal Revenue (MR)
(i)When TR increases at an increasing rate, MR increases.
(ii)When TR increases at a diminishing rate, MR decreases but remains positive.
(iii)When TR is constant and maximum, MR is zero.
(iv)When TR decreases, MR becomes negative.
6.Relationship between Average Revenue (AR) and Marginal Revenue (MR)
(i)When AR is constant, it is equal to MR under perfect competition.
(ii)When AR is diminishing, MR also diminishes but AR diminishes at a faster rate as in the case of monopoly and monopolistic competition.
(iii)MR can be zero or negative but not AR.
(iv)AR curve is the demand curve of the firm, at the mid-point of AR curve (E d = 1), MR is zero.
(v)Below the mid-point of AR curve (E d < 1), MR becomes negative.
(vi)Slope of MR curve is half of slope of AR curve.
7.AR Curve is Firm’s Demand Curve Firm’s demand curve is a curve showing relationship between price of the products and its quantity demanded in the market.
8.AR Curve is a Horizontal Straight Line Under Perfect Competition A firm under perfect competition is a price taker. It cannot influence/change the market price, implying a constant AR for a firm corresponding to all levels of output and it coincide with MR curve.
9.AR Curve Slopes Downwards Under Imperfect Competition Under monopoly and monopolistic competition, more of the commodity can be sold only at a lower price. This implies an inverse relationship between price of the commodity and demand for the firm’s output. Hence, it is a downward sloping firm’s demand curve. However, MR curve lies below AR curve.
10.General Relationship Between AR and MR Curve
(i)When AR curve rises, MR > AR.
(ii)When AR curve reaches its maximum and constant, MR = AR.
(iii)When AR curve falls, MR < AR.
(iv)MR curve can be zero or negative however, AR curve can neither be zero nor negative.
Previous Years Examination Questions
1.Define Marginal Revenue. (All India 2013,2009,2008,2007,2006; Delhi 2006)
Ans . Marginal Revenue (MR) is the change in total revenue on account of the sale of an additional unit of output.
2.What is the behaviour of average revenue in the market, in which a firm can sell more only by lowering the price? (hots; Delhi 2012)
Ans . Average Revenue falls in the market, in which a firm can sell more only by lowering the price, i.e.imperfect competition
3.What is the behaviour of Marginal Revenue in the market, in which a firm can selll any quantity of the output it produces at a given price?(hots; All India 2012)
Ans. In a perfectly competitive market, firm’s Marginal Revenue is just equal to the market price and it will be a horizontal line parallel to X-axis.
4.Define revenue.(Delhi 2008)
or
Give meaning of revenue in microeconomics.(Delhi 2007; All India 2006)
Ans . Revenue refers to money receipts of the producer from the sale of his output.
3 Marks Questions
5.Draw Average Revenue and Marginal Revenue curves in asingle diagram of a firm, which can sell more units of a good only by lowering the price of that good. Explain.(Delhi 2011)
Ans. Under imperfect competition, firms faces a downward sloping AR and MR curves, as under this form of market, firms can sell higher output only at lower price, resulting in downward slope of AR and MR, curves wherein MR lies below AR because additional revenue of every addition unit sold is less than the price of output.
6.Draw a single diagram of the Average Revenue and Marginal Revenue curves of a firm, which can sell any quantity of the good at a given price Explain(All India 2011)
Ans . Under perfect competition, a firm is a price taker. It can not influence/change the market price. It can sell any number of units of output at the prevailing price. If a firm tries to sell at a price higher than market price, it will lose all its customers. Firm’s price line or revenue curve is a straight horizontal line. AR and MR Curves coincide with each other
7.Explain the relation between Marginal Revenue and Average Revenge. (Delhi 2010C)
Ans. Relationship between Marginal Revenue (MR) and Average Revenue (AR) is:
(i)When AR curve rises, MR > AR
(ii)When AR curve reaches its maximum and constant, MR = AR.
(iii)When AR curve falls, MR < AR.
(iv) MR curve can be zero or negative however, AR curve can neither be zero nor negative.
8.Explain the relationship between Marginal Revenue and Total Revenue.(All India 2008,2007)
Ans . Relationship between Total Revenue (TR) and Marginal Revenue (MR) is :
(i) When TR increases at an increasing rate, MR increases
(ii)When TR increases at a diminishing rate, MR decreases but remains positive.
(iii)When TR is constant and miximum, MR is zero.
(iv)TR decreases, when MR becomes negative.
4 Marks Questions
9.A producer can sell more of a good only by lowering the price. Prepare a Total Revenue and Marginal Revenue schedule. Take four output levels. (All India 2010)
10.A producer can sell any quantity of output of the good he produces at a given price. Prepare a Total Revenue and Marginal Revenue schedule for four output levels.(Delhi 2010C)
11.Complete the following table(Delhi 2009)
12.Complete the following table(All India 2009)
Ans.
13.A firm can sell as many units of a good as it wants to sell at a given price. Draw
(i)Total Revenue curve and(ii) Average Revenue and Marginal Revenue curves of the firm
State the relation between Average Revenue and Marginal Revenue curves in this case. (All India 2009)
Ans . (i) Total Revenue, Average Revenue and Marginal Revenue curves of the perfectly competitive firm. Here, AR and MR curves are perfectly elastic and TR curve is upward sloping straight line because as output rises, the price remains constant and TR increases
(ii)When firm can sell any level of output at a given price, it means that price, i.e. AR remains constant. In this case, MR and AR coincide with each other as Marginal Revenue (MR) is equal to the Average Revenue (AR), which is constant. Also, TR will be a straight line from origin indicating that TR is increasing at a constant rate, since MR is constant.
14.A firm can sell as many units of a good as it wants to sell at a given price. Prepare a schedule showing Total Revenue, Average Revenue and Marginal Revenue of such a firm. State the relation between Average Revenue and Marginal Revenue in this case. (All India 2009)
(ii)Relationship between Marginal Revenue (MR) and Average Revenue
Relationship between Marginal Revenue (MR) and Average Revenue (AR) is:
(i)When AR curve rises, MR > AR
(ii)When AR curve reaches its maximum and constant, MR = AR.
(iii)When AR curve falls, MR < AR.
(iv) MR curve can be zero or negative however, AR curve can neither be zero nor negative.
15.Define revenue. State the relation between Marginal Revenue and Average Revenue (Delhi 2009C)
Ans. Revenue refers to money receipts of the producer from the sale of his output.
Relationship between Marginal Revenue (MR) and Average Revenue (AR) is:
(i)When AR curve rises, MR > AR
(ii)When AR curve reaches its maximum and constant, MR = AR.
(iii)When AR curve falls, MR < AR.
(iv) MR curve can be zero or negative however, AR curve can neither be zero nor negative.
16.Complete the following table (All India 2008)
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