Question

Mr. White, a manufacturer, has the following record of output and its corresponding revenue. $$ \begin{array}{|c|c|} \hline \text { Units of Output } & \text { Total Revenue } \\ \hline 0 & \$ 0 \\ \hline 1 & 19 \\ \hline 2 & 52 \\ \hline 3 & 93 \\ \hline 4 & 136 \\ \hline 5 & 175 \\ \hline 6 & 210 \\ \hline 7 & 217 \\ \hline 8 & 208 \\ \hline \end{array} $$ Compute the a) Marginal Revenue, b) Average Revenue

Short answer

The marginal and average revenue for Mr. White's output are as follows: $$ \begin{array}{|c|c|c|c|} \hline \text { Units of Output } & \text { Total Revenue } & \text { Marginal Revenue } & \text { Average Revenue } \\ \hline 0 & \$ 0 & - & - \\ \hline 1 & 19 & 19 & 19 \\ \hline 2 & 52 & 33 & 26 \\ \hline 3 & 93 & 41 & 31 \\ \hline 4 & 136 & 43 & 34 \\ \hline 5 & 175 & 39 & 35 \\ \hline 6 & 210 & 35 & 35 \\ \hline 7 & 217 & 7 & 31 \\ \hline 8 & 208 & -9 & 26 \\ \hline \end{array} $$

Step-by-step solution

Calculate Marginal Revenue

To calculate marginal revenue for each unit of output, find the difference in total revenue between consecutive output levels. To do this, subtract the total revenue of the previous output level from the total revenue of the current output level. For example, to find the marginal revenue for the 3rd unit of output, subtract the total revenue for 2 units of output from the total revenue for 3 units of output: \[(93-52) = 41\] Repeat this process for each unit of output.

Calculate Average Revenue

To calculate average revenue for each unit of output, divide the total revenue by the number of units of output. For example, to find the average revenue for the 3rd unit of output, divide the total revenue for 3 units of output by the 3 units of output: \[\frac{93}{3}=31\] Repeat this process for each unit of output.

Present the Results

Now that we have calculated the marginal revenue and average revenue for each unit of output, we will list the results in a table. $$ \begin{array}{|c|c|c|c|} \hline \text { Units of Output } & \text { Total Revenue } & \text { Marginal Revenue } & \text { Average Revenue } \\ \hline 0 & \$ 0 & - & - \\ \hline 1 & 19 & 19 & 19 \\ \hline 2 & 52 & 33 & 26 \\ \hline 3 & 93 & 41 & 31 \\ \hline 4 & 136 & 43 & 34 \\ \hline 5 & 175 & 39 & 35 \\ \hline 6 & 210 & 35 & 35 \\ \hline 7 & 217 & 7 & 31 \\ \hline 8 & 208 & -9 & 26 \\ \hline \end{array} $$

Key concepts

Total Revenue

Total revenue is a crucial measure in both accounting and economics that represents the total money acquired by a business through its sales of goods or services. It is calculated by multiplying the price at which goods or services are sold by the total quantity sold. In our example with Mr. White's manufacturing output, total revenue is directly obtained depending on the number of units he sells.

For instance, if Mr. White sells 3 units of his product at a gradually increasing price and revenue, the total revenue is recorded at the sale of each unit. This information gives us insight not only into the company's performance but also into market dynamics such as demand and pricing strategies. Here, revenue generally increases with each additional unit sold, reflecting a positive sales trend.

Average Revenue

Average revenue can be described as the income received from each unit of output sold and is calculated by dividing total revenue by the number of units sold. This figure helps businesses understand what they are earning on an average per product basis, which can be critical for pricing, cost analysis, and strategic planning.

Using Mr. White's data as an illustration, if his total revenue for selling 3 units is $93, the average revenue per unit would be \(\frac{93}{3}=31\). It reflects what each unit contributes on average to the total revenue and can indicate whether the pricing strategy is effective as output increases. A stable or increasing average revenue usually suggests healthy business conditions, while a decline may prompt a review of pricing or cost structures.

Revenue Calculation

Revenue calculation combines key financial metrics, including total revenue, average revenue, and marginal revenue, to provide an overall picture of a company's sales performance. Total revenue is the aggregate amount of money generated, average revenue gives the revenue per unit, and marginal revenue is the additional revenue generated from selling one more unit.

These metrics provide a layered understanding of sales to Mr. White or any business owner. Calculating revenue is an ongoing task that involves keeping track of multiple sales variables such as unit sales, price changes, and market conditions. In the exercise, marginal and average revenues were computed using the provided output and total revenue data, ensuring accuracy and meaningful insights for decision-making.

Economic Output

Economic output refers to the total quantity of goods or services produced by a company or an economy in a given time period. In business scenarios, like that of Mr. White's manufacturing output, it is usually quantified as the number of units produced and sold. Economic output is closely tied to total revenue, as more output often leads to higher revenue, but the relationship isn't always straightforward. Market saturation, variable costs, and pricing strategies can affect this dynamic.

Understanding the principles of economic output and its effect on revenue can help businesses navigate production and operational strategies to optimize growth. As Mr. White's data suggests, increasing output does not necessarily mean increasing total revenue if the products are not sold; hence, monitoring economic output is vital for financial health and strategic direction.