Question

QUESTION FIVE

From the figures given below;

OUTPUT(UNITS) TOTAL REVENUE (K’000)

50 750

60 840

70 910

80 960

90 990

100 1000

You are required to:

a) Calculate the average revenue [3 marks]

b) Calculate the marginal revenue [2 marks]

c) Draw the average revenue curve [2 marks]

d) Determine the market structure [1 mark]

e) Mention two features of the market structure in (d) [2 marks]

Answer 1

a) Calculate the average revenue [3 marks]

The formula to calculate average revenue is given by:

Average revenue = $\frac{Total\,revenue}{Total\,units}$

For 50 units

Average revenue = $\frac{750}{50} = 15$

For 60 units

Average revenue = $\frac{840}{60} = 14$

For 70 units

Average revenue =$\frac{910}{70} = 13$

For 80 units

Average revenue =$\frac{960}{80} = 12$

For 90 units

Average revenue =$\frac{990}{90} = 11$

For 100 units

Average revenue =$\frac{1000}{100} = 10$

The pictorial representation is shown below:

b) Calculate the marginal revenue [2 marks]

Marginal Revenue = Change in Revenue / Change in Quantity

For 60 units

Marginal revenue = $\frac{840-750}{60-50} = 9$

For 70 units

Marginal revenue =$\frac{910-840}{70-60} = 7$

For 80 units

Marginal revenue =$\frac{960-910}{80-70} = 5$

For 90 units

Marginal revenue =$\frac{990-960}{90-80} = 3$

For 100 units

Average revenue =$\frac{1000-990}{100-90} = 1$

c) Draw the average revenue curve [2 marks]

d) Determine the market structure [1 mark]

The name of this market structure is Monopoly. Because the marginal revenue curve in this situation is downward sloping.

e) Mention two features of the market structure in (d) [2 marks]

• Barriers to entry into the market exist.
• In the market, there is just one seller.
• Discrimination based on price