question_answer

(i) Can Marginal Revenue (MR) be negative? Explain your answer with the help of example.

(ii) Total Revenue (TR) of a firm, dealing in a particular commodity, initially was Rs.15,000. It reduces to Rs.13,500. Also, AR increases from Rs. 150 to Rs. 270. Find the change in market demand for that commodity.

Or

State whether the following statements are true or false. Give reasons for your answer.

(i) When Marginal Revenue (MR) is constant and not equal to zero, then Total Revenue (TR) will also be constant,

(ii) As soon as Marginal Cost (MC) starts rising, Average Variable Cost (AVC) also starts rising.

(iii) Total Product (TP) always increases whether there is increasing returns or diminishing returns to a factor.

                                                                                                   

Answer:

(i) Yes, Marginal Revenue (MR) can be negative. It can be negative only when average revenue is decreasing or when the price is declining as under monopoly and monopolistic competition. This can be explained by the following example: When price =Rs.20, output =50 Total revenue of 50 units\[(T{{R}_{50}})=P\times Q\]=20\[\times \]50=Rs. 1,000                                                           When price fall toRs.19, output =51 Total revenue of 51 units\[(T{{R}_{51}})\]= P\[\times \]Q                              =19 \[\times \]51= Rs.969                         \[M{{R}_{51}}=T{{R}_{51}}-T{{R}_{50}}\]                                          =969 -1,000= Rs.(31)     i.e., Marginal Revenue (MR) is negative.                                                                (ii) TR =Rs.15,000, P(=AR)=Rs.150              TR=\[P\times Q\Rightarrow Q=\frac{TR}{P}=\frac{15,000}{150}=100\]units When TR=Rs.13,500, P(=AR)=Rs.270                                                              TR=\[P\times Q\Rightarrow Q=\frac{TR}{P}=\frac{13,500}{270}=50\]units Change in market demand \[=\text{ }50-100=-50\]units i.e. market demand falls by 50 units Or Output (units) Diagram Showing Super Normal Profit (i) False, because when Marginal Revenue (MR) is constant, Total Revenue (TR) is increasing at a                           Constant rate, only when Marginal Revenue is zero, Total Revenue is constant,                                      (ii) False, Average Variable Cost (AVC) can fall even when Marginal Cost (MC) starts rising. See Average Variable Cost (AVC) and Marginal Cost (MC) corresponding to (MC) corresponding to output range (MQ) in the diagram. (iii)True, because in a situation of increasing returns to a   factor, Marginal Product tends to rise accordingly, Total Product (TP) should be increasing at an increasing rate. Under diminishing returns to a factor, Marginal Product (MP) tends to fall. Falling Marginal Product (MP) implies that Total Product (TP) should be increasing, though at a decreasing rate.