It sells its tickets section 2 costs 175 07 154 185

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Unformatted text preview: to 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 marginal revenue 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 Questions 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 businesses): T-shirts 1st 2nd 3rd 4th 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.

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