(a) Define the profit of a firm [4 marks] (b) With appropriate formula, explain the
(a) Define the profit of a firm [4 marks]
(b) With appropriate formula, explain the following revenue and cost concepts:
(i) total revenue (TR); [4 marks]
(ii) average revenue (AR): [4 marks]
(iii) marginal revenue (MR); [4 marks]
(iv) average fixed cost (AFC). [4 marks]
Explanation
(a) The profit of a firm is the difference between the total revenue and total cost. Profit = TR - TC
(b)(i) Total revenue (TR) is the total amount of income generated from the sale of a firm's products.
TR = Price X Quantity sold or AR X Quantity sold.
(ii) Average revenue (AR) - This is the revenue per unit of product sold. It is also equal to the price of the firm's product.
AR = \(\frac{TR}{Q}\)
(iii) Marginal revenue (MR) - This is the addition to total revenue as an additional unit of the product is sold.
\(\frac{\DeltaTR}{\Delta}\) OR \(\frac{TR_2}{Q_2\) - \(\frac{TR_1}{Q_1\)
(iv) Average fixed cost (AFC) is the total fixed cost divided by the output.
\(\frac{TFC }{Q) = AFC.
It is the fixed cost per unit of output