when total revenue is a horizontal straight line what is marginal revenue and average revenue?
Answers
Answer:
Explanation:
Both AR and MR are Calculated from TR:
The average cost and marginal costs are calculated from total cost. In the same fashion, average revenue and marginal revenue can also be calculated from total revenue.
2. When AR and MR are Parallel to X-axis:
If average revenue and marginal revenue are parallel to horizontal axis then it means both AR and MR are equal to each other i.e. AR = MR. It has been shown with the help of table 2 and diagram 2.
Relation between Average, Total and Marginal Revenue
From this table, it is clear that when output increases prices or AR remains the same i.e. Rs. 10.
In figure 2, on X-axis, we have measured output and on Y-axis revenue. Average and marginal revenue are horizontal lines which are parallel to X-axis. It is a case under perfect competition.
Perfect Competition
3. When both AR and MR are Straight Lines:
Under imperfect competition, when AR falls, MR also falls and it is always below AR line because there are large numbers of buyers and sellers, products are not homogeneous and the firms can enter or exit the market. It can be shown with the help of a table 3.
Imperfect Competition
It is clear from the table that as price falls (AR falls) from Rs. 10 to Rs. 6, the total revenue (TR) increases from Rs. 10 to Rs. 30 at a diminishing rate. MR also falls from Rs. 10 to Rs. 2, MR is the rate at which the TR changes. It can also be drawn with the help of a Fig. 3.
Average and Marginal Revenue Curve
In Fig. 3, AR and MR curves have been shown. It shows when AR curve falls MR curve also falls, and the MR curve will be below the AR curve. But, this situation exists only under monopoly and imperfect competition.
4. If AR Curve is Rising Upward from Left to Right:
In case AR curve is rising upward from left to right, then MR curve will also move upward. It means MR will be greater than AR. This is shown with the help of a table 4 and Fig.4.
Rising of Average Revenue Curve
Rising of Average Revenue Curve
Table 4 shows that as AR or price increases from Rs. 10 to Rs. 14, units sold also go up from 1 to 5. In the same way, TR increases from Rs. 10 to Rs. 70 at an increasing rate. As a result, MR also increases from Rs. 10 to Rs. 18. In Fig. 4 we see that AR and MR both start from the same point as AR rises upwards from left to right. MR also follows the same trend i.e. above AR curve.
5. When AR and MR are Convex:
In fig. 5, AR and MR curves are convex to the origin. It means as more and more units of a commodity are sold, average revenue falls at lower speed. MR curve also moves in the same direction. The convexity shows that MR falls but at a faster speed.
Convex Average and Marginal Revenue Curves
6. When AR and MR are Concave:
The figure 6 shows that if AR is concave to the origin, MR will also be concave to the origin. It means average revenue is falling at a higher rate for each additional unit of a commodity sold. Similar would be the case for MR curve.
Concave Average and Marginal Revenue Curve
7. Revenue and Elasticity:
The elasticity of demand, average revenue and marginal revenue has a close relationship. If a firm knows any two of the three elements viz; average revenue and marginal revenue then it can easily find out the third element i.e. elasticity of demand.