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the airline)—that is, the
marginal cost to the airline—is $100. Is it in the
best interest of the airline
to sell the person a ticket
for $150? Explain your
answer. 5. An airline has 100 seats to
sell on a plane traveling
from New York to Los
Angeles. It sells its tickets
Section 2 Costs 175 07 (154-185) EMC Chap 07 11/18/05 11:47 AM Page 176 Focus Questions Revenue and
Its Applications What is total revenue?
What is marginal revenue?
Why does a business firm compare marginal
revenue with marginal cost when deciding
how many units of a good to produce? Key Terms
law of diminishing marginal returns Total Revenue and
Marginal Revenue marginal revenue
The revenue from selling
an additional unit of a
good; the change in total
revenue that results
from selling an additional unit of output. In Chapter 3, total revenue was defined as
the price of a good times the quantity sold.
For example, if the price of a book is $15 and
100 are sold, then total revenue is $1,500.
Consider the following: (1) Harris sells toys
for a price of $10 each. (2) Harris currently
sells 1,000 toys. (3) This means that Harris’s
total revenue is $10,000. If Harris sells one
more toy for $10, what is the change in total
revenue that results from the change in output sold?
To answer this question, we first calculate
what the total revenue is when Harris sells
1,001 instead of 1,000 toys; it is $10,010. We
conclude that the total revenue changes
from $10,000 to $10,010 when an additional
toy is sold. In other words, a change in total
revenue equals $10.
The change in total revenue (TR) that
results from selling an additional unit of
output is marginal revenue (MR). In other
words, marginal revenue is the additional
revenue from selling an additional unit of a 176 Chapter 7 Business Operations good. In the example, $10 is the marginal
revenue. We can write it this way:
Marginal revenue (MR) ∆TR
∆Q Marginal revenue equals the change in
total revenue divided by the change in the
quantity of output sold. Firms Have to Answer
If you start up a business, you’re going to
have to answer certain questions. For example, suppose you start a business producing
and selling T-shirts. Someone comes up to
you and asks: How many T-shirts are you
going to produce each month? What is your
answer going to be? Will you say 100, 1,000,
or 10,000? How will you go about deciding
how many T-shirts you’re going to produce?
Are you going to put different numbers in a
hat and simply draw one out? Whatever
number you draw, will that be how many
T-shirts you produce? Of course not! So,
what are you going to do? How are you 07 (154-185) EMC Chap 07 11/17/05 5:14 PM Page 177 shirts to produce? If you think about it, the
answer is fairly simple. You need to know
the marginal cost and the marginal revenue
for your T-shirts. For example, suppose you
are presented with the following data
(which is representative of many real-world
5th What questions do you think these
business executives might be trying to
answer? going to d...
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This document was uploaded on 01/16/2014.
- Winter '14