2 Definition of average revenue total revenue divided by the quantity sold 3

# 2 definition of average revenue total revenue divided

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2. Definition of average revenue: total revenue divided by the quantity sold.3. Definition of marginal revenue: the change in total revenue from an additional unit sold.II. Profit Maximization and the Competitive Firm's Supply Curve A. A Simple Example of Profit Maximization Q Total Revenue Total Cost Profit Marginal Revenue Marginal Cost Change in Profit 0 \$0 \$3 \$-3 ---- ---- ---- 1 6 5 1 \$6 \$2 \$4 2 12 8 4 6 3 3 3 18 12 6 6 4 2 4 24 17 7 6 5 1 5 30 23 7 6 6 0 6 36 30 6 6 7 -1 7 42 38 4 6 8 -2 8 48 47 1 6 9 -3 1. In this example, profit is maximized if the farm produces four or five gallons of milk (see the fourth column). 2. The profit-maximizing quantity can also be found by comparing marginal revenue and marginal cost. a. As long as marginal revenue exceeds marginal cost, increasing output will raise profit. b. If marginal revenue is less than marginal cost, the firm can increase profit by decreasing output. Total Revenue = Price QuantityTotal RevenueAverage Revenue = Quantitychange in Total RevenueMarginal Revenue = change in Quantity c. Profit-maximization occurs where marginal revenue is equal to marginal cost. B. The Marginal-Cost Curve and the Firm's Supply Decision 1. Cost curves have special features that are important for our analysis. 2. Marginal and average revenue can be shown by a horizontal line at the market price. 3. To find the profit-maximizing level of output, we can follow the same rules that we discussed above. 4. These rules apply not only to competitive firms, but to firms with market power as well. 5. If the price in the market were to change to P2, the firm would set its new level of output by equating marginal revenue and marginal cost. 6. Because the firm's marginal cost curve determines how much the firm is willing to supply at any price, it is the competitive firm's supply curve.  #### You've reached the end of your free preview.

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