Revenue and Producers Equilibrium AK 2023 - 24

Answer Key
2023-2024
Class: 11 Worksheet Subject: Economics
Number: 11/Eco/12&13/AK Chapter: 12&13 – Revenue and
Producer’s equilibrium
Section A
Each question carries 1mark :
1. When firm is able to sell more quantity of output at the same price
a) AR > MR
b) AR = MR
c) AR <MR
d) None of the above
2. What is firm’s demand curve?

Firm’s demand curve is the curve showing the relationship between price of the
product and itsquantity demanded in the market. A firm’s demand curve is same as
AR curve and also knownas firm’s price line.
3. Define Total Revenue.

Total revenue is defined as the market value of the total output of a good produced. TR = P x Q
4. Define Marginal Revenue.

Marginal revenue is defined as addition to total revenue from producing one more
unit of output.MR = TR n – TR n-1
5. Define Producer’s Equilibrium.

Producer’s equilibrium means that combination of price and output which yields
the producer maximum profit and the profit declines as more is produced.
6. What is the behavior of marginal revenue in a market in which firm can sell any quantity
of the output it produces at a given price?
It is a case of perfect competition. MR under perfect competition is constant as TR
increases at a constant rate, and thus is parallel to x –axis.
7. When AR is constant, what is the relationship between AR and MR?

It is a case of perfect competition where AR = MR. When AR is constant then
MR is also constant as TR increases at constant rate.
8. Show that Average revenue equals Price.

AR = TR/Q
We also know that
TR = P x QThus,
AR = P x Q
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2023-2024
Q
AR = P
Therefore, AR = Price
9. What is the shape of TR curve of a price taking firm?
Price taking firm is a feature of perfect competition; here more can be sold at a given
price. Thus TR increasers at a constant rate, implying an upward sloping straight
line passing through zero.
10. What is the shape of AR curve of a monopoly firm?

Under monopoly, more can be sold by lowering the price, this shows an inverse
relation betweenprice and quantity for the firms output. Thus AR is a sloping
downward from left to right.
11. What is the relationship between TR, Price and Quantity sold?
TR = P x Q
12. When price remains constant at all levels of output , total revenue :
a) Increases at increasing rate
b) Increases at diminishing rate
c) Increases at constant rate
d) None of them
13. Assume that when price is Rs 20, the quantity demanded is 9 units and when
the price is Rs 19 quantity demanded is 10 units. Based on this information
what is the marginal revenue resulting from an increase in output from 9
units to 10 units:
a) Rs.18
b) Rs.10
c) Rs.16
d) Rs.28
14. A firm is able to sell any quantity of a good at a given price. The firm’s
marginal revenue will be:
a) Greater than Average Revenue
b) Less than Average Revenue
c) Equal to Average Revenue
d) Z ero
15. When does a producer earn maximum profit?

When TR – TC is maximum
Answer Key
2023-2024
16. What is the effect on MR when a perfectly competitive firm tries to sell more?
Under perfect competition, more can be sold at a given price. Thus when a
perfectly competitive firm tries to sell more it will have to sell at a given price
only. TR increases at a constant rate implying a constant MR, horizontal line
parallel to X axis.
17. Read the following statements carefully:

Statement 1- Profit refers to the excess of revenue over cost.
Statement 2 - Profit of a firm is minimum when MR =MC
a) Both statements -1 and statement - 2 are true and statement 2 is the correct
explanation of statement - 1
b) Both statements -1 and statement - 2 are true but statement - 2 is not the correct
explanation of statement - 1
c) Statement -1 is true and statement - 2 is false
d) Statement -1 is false and statement - 2 is true
18. Read the following statements: Assertion (A) and Reason (R). Choose the correct alternative
from those given below:
Assertion (A): AR is a sloping downward from left to right under monopoly
Reason (R): This is because when AR is constant then MR is also constant.
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation
of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct
explanation of Assertion (A).
c) Assertion (A) is true, but Reason (R) is False
d) Assertion (A) is false, but Reason (R) is True
Section B
Each question carries 3/4 marks :
Answer Key
2023-2024
19. Explain the relationship between TR and MR.

Relation between TR and MR can be seen from the angle of:
a. When more can be sold by lowering the price
 Initially TR increasing at a decreasing rate , MR falls
but remains positive – Rising of TR at a decreasing
rate signifies ,decreasing MR .TR rising signifies that
MR is positive.
 When TR becomes maximum, MR becomes zero.TR
being maximum signifies that no more addition is
possible to TR. The addition is nothing but MR.
Clearly then it signifies MR is zero
 When TR starts falling MR becomes negative. TR
starts falling signifies negative addition to TR. This
further signifies that MR is negative
b. When more can be sold at a given price -TR rises but at a constant rate
because price is constant. Graphically TR curve is upward sloping throughout. As
output increases there is no change in MR. It is because the price per unit is
unchanged. Thus there is only one relation
between TR & MR i.e. TR rises but at a
constant rate, MR is constant throughout.
20. Can MR be zero or negative? Justify your answer. `

Negative MR is possible only when price is declining as under monopoly or
monopolistic competition. It is not possible in case of perfect competition where
price is given to a firm, so that AR=MR and both are constant.
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2023-2024
21. Explain the relationship between AR and MR of a firm selling more at a lower price. Use
diagram.
Definition of AR and MR with formula.
a) Both MR and AR falls, MR falls at twice the rate than AR.
b) MR is less than AR throughout.
c) Since MR falls at twice the rate, MR curve lies at the center of AR curve and
Yaxis.(Draw AR and MR curve under imperfect form of market)
22. What changes will take place in Marginal Revenue when:

a) Total Revenue increases at a constant rate- MR is constant, horizontal line
parallel to x axis.
b) Total Revenue increases at a diminishing rate- MR falls continuously and
touches zero when TR is maximum.
23. Giving reasons, state whether the following are true or false.
a) When MR is positive and constant, Average and Total Revenue will both
increase at constant rate - False .When MR is positive and constant; Average
Revenue is also positive and constant and is equal to MR but TR increases
at constant rate.
b) When TR is maximum, MR is also maximum – false, when Tr is maximum,
MR is zero.
c) Average revenue can be zero - Average cannot be zero as AR = TR/QWe
also know that TR = P X Q
Thus AR = P X Q /Q = P
Thus it is proved that AR = Price. And price of a commodity cannot be zero
a) When MR falls to zero, AR becomes maximum –False, MR can be zero
in imperfect competition. When MR falls to zero, then AR is diminishing.
b) When MR is constant and not equal to zero, then TR will also be constant –
False, whenMR is constant and not equal to zero, then TR will increase at
constant rate.
25. Draw in a single diagram the average revenue and marginal revenue of a firm which can
sell any quantity of the good at a given price. Explain.
Under perfect compt. More can be sold at the given price. Thus TR increases at an
constant rateleading to a constant MR. Since price is equal to AR, thus AR is also
constant and equals to the MR.
Answer Key
2023-2024
Section C
Each question carries 6 marks :
26. Explain the relationship between TR, AR and MR of perfectly competitive form of
market with the help of a diagram.
Definition TR, AR and MR with formula.
In case price (AR) is constant as under perfect competition, MR is also constant. Implying that
TR increases at a constant rate. Because, MR indicates the rate at which TR increase. Increasing
at constant rate, TR forms a straight line sloping upwards and starting from the origin. Add
diagram
27. What is revenue of a firm? Give meaning of AR and MR. What happens to AR when MR
is a) equal to AR b) less than AR.
Definition of TR, MR and AR with formula.
a) When MR is equal AR, AR is constant
b) When AR is less than MR , then AR falls
28. What is Producer’s equilibrium? Explain the conditions in terms of MC and MRapproach
when more can be sold at the given price. Use a schedule.
Producer‘s equilibrium means that combination of price and output which yields
Conditions:
a. MC = MR
b. MC>MR, after the MC = MR
The two conditions are explained below:
a) MR is the gain of revenue from producing one more unit of
output. MC is the cost of producing one more output, clearly if
the gain is higher than the cost; it is profitable to produce the unit.
Answer Key
2023-2024
Suppose when a producer starts production finds MR greater than

MCas he goes on producing he may face the output level when
MC becomes equal to MR. This output level satisfies MR =MC
condition.
b) MC>MR, after the MC = MR
Whether this level of output is equilibrium level of output or not
will depend upon whether beyond this output, MC is less than MR
or is greater than MR. IF MC is greater than MR the second
condition is also satisfied and the output is equilibrium level of
output. MC being greater than MR makes production of more
units unprofitable. If MC is found to be less than MR on producing
more than MC = MR output level, it means it is profitable to
produce extra unit and the given MC = MR output is no longer
the equilibrium output level. By producing more, profits can be
increased.
Price Output TR TC MR MC PROFIT Situations
10 1 10 10 10 10 0 MC=MR
10 2 20 18 10 8 2 MC <MR
10 3 30 24 10 6 6 MC<MR
10 4 40 34 10 10 6 EQULIBRIU
M
10 5 50 46 10 12 4 MC>MR
th
Profit is maximum at the 4 level of output at which the difference between TR and
TCis maximum and total profit declines as one more unit of output is produced.
In the table equilibrium is at 4 units of output, TR- TC is maximum Rs 6 and at the
sametime profits starts declining as one more unit of output is produced.
Thus simple maximization of the difference between TR- TC is not sufficient to
ensureequilibrium. Along with it is required that profits starts declining as more is
produced.
29. Explain Producer’s equilibrium in terms of MC and MR. Support your answer using a
diagram.
the producermaximum profit and the profit declines as more is produced.
Conditions
a. MC = MR
Answer Key
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c) MR is the gain of revenue from producing one more unit of

the gain is higher than the cost, it is profitable to produce the unit.
MC as he goes on producing he may face the output level when
MC become s equal top MR. This output level satisfies MR =MC
condition.
d) MC>MR, after the MC = MR
condition is also satisfied and the output is equilibrium level; of
increased
MR curve is parallel to X axis because it is assumed that price remains unchanged

as output increases. MC curve is U shaped. MR and MC curve intersects at two
points A & B. A is not equilibrium level of output as only one condition is satisfied
that is MR = MC and MC < MR As more is produced. So it is still more
profitable to produce more. So long as profit tends toincrease equilibrium
output is not reached.
B level of output is equilibrium as, at B where profit is at its maximum, MR= MC
and is followed by MC> MR i.e. additional cost is more than revenue.
Answer Key
2023-2024
30. Explain why will a producer not be in equilibrium if a sufficient condition of equilibrium
is not met?
For a producer to be in equilibrium both conditions must be met:

a. MC = MR
e) MR is the gain of revenue from producing one more unit of
the gain is higher than the cost; it is profitable to produce the unit.
MCas he goes on producing he may face the output level when
MC becomes equal to MR. This output level satisfies MR =MC
condition.
f) MC>MR, after the MC = MR
condition is also satisfied and the output is equilibrium level of
increased.
31.
Calculate AR , TR and MR from the following data:
Units 10 9 8 7 6 5 4
Price 1 2 3 4 5 6 7
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32.
Given below is the table of a competitive firm. Calculate the profit at each level of output.
Also determine the market price of the good and producer’s equilibrium.
Output TR TC
0 0 5
1 5 7
2 10 10
3 15 12
4 20 15
5 25 23
6 30 33
7 35 40
33.
With the help of the table below, Find Producer’s Equilibrium also give reasons for your
answer.
Output 1 2 3 4 5 6
TR (Rs.) 20 40 60 80 100 120
AC (Rs.) 20 15 12 10 12 15
Refer Attachment
34. Calculate Price, AR and TR from the following data:
Output 1 2 3 4 5
MR (Rs.) 10 8 6 4 2
Refer Attachment
35. From the following table, find out the level of output at which the producer will be in
equilibrium. Give reasons for your answer.
OUTPUT (UNITS) MARGINAL REVENUE MARGINAL COST (Rs)
(Rs)
1 8 10
2 8 8
3 8 7
4 8 8
5 8 9
Refer Attachment
36. What should be the firm’s profit, when AVC is Rs.20 per unit, AFC is Rs.10 per unit,
price of the output is Rs.25 per unit and 8 units of output are produced?
Refer Attachment
Section C
Answer Key
2023-2024
Each question carries 3 marks:

37.
What is firm’s price line? What is its shape?
A firm’s price line is same as Firms AR curve.
Under perfect competition a firm’s price line is a horizontal straight line. Both AR
and MR tends coincide.
Under monopoly and monopolistic competition, firm’s price line slopes
downwards. When ARslopes downwards, MR , slopes downward faster than AR ,
implying MR <AR.
a) Marginal revenue is always the price at which the last unit is sold - False, Marginal
revenue simply refers to additional revenue when an additional unit of a commodity is
sold. It happens to be equal to the price under perfect competition but under
monopoly and monopolistic AR and MR is not same.
b) Greater production always means greater revenue – False, greater
production does not mean greaterrevenue (TR). Price (AR) may fall so much
that higher output yields lower TR
39. Why should MC be rising at the point of equilibrium?

MC being greater than MR makes production of more units unprofitable. If MC is found to be
less than MR on producing more than MC = MR output level, it means it isprofitable to
produce extra unit and the given MC = MR output is no longer the equilibrium output level.
By producing more, profits can be increased
40. Comment on the following statement ‘firms should maximize the difference between
marginal cost and marginal revenue’.
The statement is false the firms should maximize profit which is difference between TR – TC.
At the profit maximizing level of output MR=MC.
41. Profits are not maximized when MR and MC are not equal. Why?
We can consider two situations:
a) When MR>MC: It implies that every additional unit of output brings
greater revenuethan cost Increase in output in such a situation would
increase the level of profits.
b) When MR <MC: It implies that every additional unit of output causes
greater cost thanrevenue. A cut in the level of output in such a situation
would increase the level of profits.
Thus when MR >MC output needs to be increased and when MR<MC production needs to be
stop.
Answer Key
2023-2024

Revenue and Producers Equilibrium AK 2023 - 24

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Answer Key

2. What is firm’s demand curve?

3. Define Total Revenue.

4. Define Marginal Revenue.

5. Define Producer’s Equilibrium.

7. When AR is constant, what is the relationship between AR and MR?

8. Show that Average revenue equals Price.

10. What is the shape of AR curve of a monopoly firm?

15. When does a producer earn maximum profit?

17. Read the following statements carefully:

19. Explain the relationship between TR and MR.

20. Can MR be zero or negative? Justify your answer. `

22. What changes will take place in Marginal Revenue when:

Suppose when a producer starts production finds MR greater than

c) MR is the gain of revenue from producing one more unit of

MR curve is parallel to X axis because it is assumed that price remains unchanged

For a producer to be in equilibrium both conditions must be met:

Each question carries 3 marks:

39. Why should MC be rising at the point of equilibrium?

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