(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