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Economics Lecture Ten (view source)

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'''''You should use your midterm exam as a learning tool to make sure you understand the material in questions you answered incorrectly. Those questions are the heart of this course, and the more that you can learn from your mistakes, the better you will do on the final exam here and the CLEP'''''. Each year I put on the final exam an identical question that was on the midterm exam. Don't answer it incorrectly again!

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~~Let's now~~ begin to learn some of the new concepts listed above.

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First we will review a concept from the midterm exam, and then we will begin to learn some of the new concepts listed above.

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== Marginal Analysis ==

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Virtually every single student in the class missed the question relating to relationship between total revenue and marginal revenue. This question tests to see if the student understands marginal analysis. Let's review this so no one misses it again.

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Marginal "something" is how much that "something" is increasing or decreasing at a particular time or amount of output. Your marginal increase in height, for example, is how much you are growing at this time.

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Marginal revenue is how much the total revenue of a firm increases or decreases at a certain amount of output. If the firm produces 5 units, its marginal revenue is the amount that total revenue increased when it produced and sold that 5th unit.

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The question on the midterm asked what the marginal revenue is when the total revenue is at its maximum. If you don't know the answer, then try a few possibilities. What if marginal revenue were positive? Then producing another unit of output would generate additional total revenue by an amount equal to the positive marginal revenue. But the problem said that total revenue is at its maximum, so it is not possible to increase it. Therefore marginal revenue cannot be positive.

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What if marginal revenue were negative? Then reducing the output by one unit would have the effect of eliminating the negative marginal revenue for that unit. This would increase the total revenue. But that is not possible because total revenue is at its maximum. So marginal revenue cannot be negative.

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If marginal revenue cannot be positive, and it cannot be negative either, then there is only one possibility left: marginal revenue must be zero.

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