MATH PROJECT

2021 - 2022

KEERTHANA V
12 – A
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NPS INTERNATIONAL CHENNAI
PROJECT

YEAR: ----2021-2022----

NAME : ----Keerthana-V------------------------

GRADE : ----12------------------------------------

ROLL NO : --------------------------------------------

SUBJECT : ----Mathematics------------------------

TOPICS : PROJECT 1: A study of conditional

probability, the theorem of total
probability and the concept of Bayes’
theorem.
----------------------------------------------------
PROJECT 2: A rough sketch on
Revenue (R), Average Revenue (AR)
and Marginal Revenue (MR).

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 NPS INTERNATIONAL, CHENNAI
Perumbakkam, Chennai – 600 100

REG NO:

CERTIFICATE
Certified that this is a bonafide record of project work done
by…………Keerthana.V…………………………………
in the subject………Mathematics………...................... during
the academic year
2021-2022.
Date: ……………...
Teacher-in-Charge

Submitted to the ISC Board on ……………………………

held in NPS International, Chennai ………………………...

1.

2.
Principal Examiner

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 ACKNOWLEDGEMENT:

This project was carried out under the guidance of my Math teachers of NPS
International, Chennai. I am grateful to them for their guidance, valuable
suggestions and constant encouragement.
I owe my gratitude to Ms. Sudha Balan, Principal, NPSI, Chennai, for being a
constant source of inspiration and support.
I humbly extend my gratitude to all the faculty members of the school for their
guidance and help.
I would like to also thank the CISCE Board for giving me an opportunity to do
this project. The entire experience has been insightful and edifying.
I extend my gratitude to my parents who have guided, supported and
encouraged me in doing this project.

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 INDEX

S.No TOPIC Pg. No

PROJECT 1:
1. Introduction 12
2. Conditional probability 13
3. Total probability theorem 20
4. Bayes’ theorem 26
5. Conclusion 32
PROJECT 2:
1. Introduction 36
2. Total revenue 39
3. Average Revenue 40
4. Marginal revenue 41
5. Graphical representation of the Curves 44
6. Conclusion 49
Bibliography 51

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 PROJECT-1

A study of conditional probability, the

theorem of total probability and the

concept of Bayes’ theorem

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INTRODUCTION:

>>Probability:
Probability is the branch of mathematics concerning numerical descriptions of
how likely an event is to occur, or how likely it is that a proposition is true. The
probability of an event is a number between 0 and 1, where, roughly speaking, 0
indicates impossibility of the event and 1 indicates certainty.

Probability is a measure of the likelihood of an event to occur. Many events

cannot be predicted with total certainty. We can predict only the chance of an
event to occur i.e., how likely they are to happen, using it. Probability can range
in from 0 to 1, where 0 means the event to be an impossible one and 1 indicates
a certain event. Probability for Class 10 is an important topic for the students
which explains all the basic concepts of this topic. The probability of all the
events in a sample space adds up to 1.

Example: There are 6 pillows in a bed, 3 are red, 2 are yellow and 1 is blue.
What is the probability of picking a yellow pillow?

Ans: The probability is equal to the number of yellow pillows in the bed divided
by the total number of pillows, i.e., 2/6 = 1/3.

+
+

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CONDITIONAL PROBABILITY:
Conditional probability is defined as the likelihood of an event or outcome
occurring, based on the occurrence of a previous event or outcome. Conditional
probability is calculated by multiplying the probability of the preceding event
by the updated probability of the succeeding, or conditional, event. This concept
is one of the quintessential concepts in the probability theorem. The concept of
conditional probability is primarily related to the Bayes’ theorem, which is one
of the most influential theories in statistics.

>>Formula for Conditional Probability:

Where:

➢ P (A|B) – the conditional probability; the probability of event A occurring

given that event B has already occurred
➢ P (A ∩ B) – the joint probability of events A and B; the probability that
both events A and B occur
➢ P (B) – the probability of event B
The formula above is applied to the calculation of the conditional probability of
events that are neither independent nor mutually exclusive.

>>Conditional probabilities can also be found using a

tree diagram:

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Example:

➢ Tree diagram of two coins tossed:

➢ To calculate the overall probability

• We multiply probabilities along the branches
• We add probabilities down columns

• The probability of "Head, Head" is 0.5×0.5 = 0.25

• All probabilities add to 1.0 (which is always a good check)
• The probability of getting at least one Head from two tosses is
0.25+0.25+0.25 = 0.75

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>>Chain rule for conditional probability:
The formula for conditional probability in the following format:

This format is particularly useful in situations when we know the conditional

probability, but we are interested in the probability of the intersection. We can
interpret this formula using a tree diagram such as the one shown in the Figure:
tree diagram. In this figure, we obtain the probability at each point by
multiplying probabilities on the branches leading to that point.
This type of diagram can be very useful for some problems.

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>>Problems based on conditional probability
Q1)
You purchase a certain product. The manual states that the lifetime
T of the product, defined as the amount of time (in years) the product
works properly until it breaks down, satisfies
P(T≥t) = e−t5, for all t≥0.
For example, the probability that the product lasts more than (or
equal to) 2 years is P(T≥2) = e−25=0.6703. I purchase the product
and use it for two years without any problems. What is the
probability that it breaks down in the third year?

Solution)
Let A be the event that a purchased product breaks down in the third
year. Also, let B be the event that a purchased product does not
break down in the first two years. We are interested in P(A|B). We
have

P(B) = P(T≥2)
=e−25.

We also have
P(A) = P(2≤T≤3)
=P(T≥2)−P(T≥3)
=e−25−e−35.

Finally, since A⊂B, we have A∩B=A. Therefore,

P(A|B) = P(A∩B)P(B)
=P(A)P(B)
=e−25−e−35e−25
=0.1813

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Q2)
You toss a fair coin three times:
a) What is the probability of three heads, HHH?
b) What is the probability that you observe exactly one heads?

c)Given that you have observed at least one heads, what is the
probability that you observe at least two heads?

Solution)
We assume that the coin tosses are independent.
P(HHH) = P(H)⋅P(H)⋅P(H)=0.53=18.
To find the probability of exactly one heads, we can write

P (One heads) = P(HTT∪THT∪TTH)

=P(HTT)+P(THT)+P(TTH)
=18+18+18
=38.

Given that you have observed at least one heads, what is the
probability that you observe at least two heads? Let A1 be the event
that you observe at least one heads, and A2 be the event that you
observe at least two heads. Then
A1=S−{TTT}, and P(A1) = 78;
A2= {HHT, HTH, THH, HHH}, and P(A2) = 48.
Thus, we can write
P(A2|A1) = P(A2∩A1) P(A1)
=P(A2) P(A1)
=48.87 = 47.

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Q3)
In my town, it's rainy one third of the days. Given that it is rainy,
there will be heavy traffic with probability 12, and given that it is not
rainy, there will be heavy traffic with probability 14. If it's rainy and
there is heavy traffic, I arrive late for work with probability 12. On
the other hand, the probability of being late is reduced to 18 if it is
not rainy and there is no heavy traffic. In other situations (rainy and
no traffic, not rainy and traffic) the probability of being late is 0.25.
You pick a random day.
a) What is the probability that it's not raining and there is heavy
traffic and I am not late?
b) What is the probability that I am late?
c) Given that I arrived late at work, what is the probability that it
rained that day?

Solution)

Let R be the event that it's rainy, T be the event that there is heavy
traffic, and L be the event that I am late for work. We are given
conditional probabilities in a chain format. Thus, it is useful to draw
a tree diagram. In the figure, each leaf in the tree corresponds to a
single outcome in the sample space.

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a) The probability that it's not raining and there is heavy traffic and
I am not late can be found using the tree diagram:
P (Rc ∩ T ∩ Lc) = P (Rc) P (T | Rc) P (Lc | Rc ∩ T)
=23⋅14⋅34
=18.

b) The probability that I am late can be found from the tree. All we
need to do is sum the probabilities of the outcomes that
correspond to me being late. In fact, we are using the law of total
probability here.

P (L) =P (R, T, L) + P (R, Tc, L) + P (Rc, T, L) + P (Rc, Tc, L)

=112+124+124+116
=1148.

c) We can find P (R | L) using P (R | L) =P (R ∩ L) P (L). We have

already found P (L) = 1148, and we can find P (R ∩ L) similarly
by adding the probabilities of the outcomes that belong to R ∩ L.
In particular,

P (R∩L) = P (R, T, L) + P (R, Tc, L)

=112+124
=18.
Thus, we obtain
P (R|L) = P (R ∩ L) P (L)
=18.4811
=611.

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TOTAL PROBABILITY THEOREM:
The “Law of Total Probability” (also known as the “Method of Conditioning”)
allows one to compute the probability of an event E by conditioning on cases,
according to a partition of the sample space. The Total Probability Rule is a
fundamental rule in statistics relating to conditional and marginal probabilities.
The rule states that if the probability of an event is unknown, it can be
calculated using the known probabilities of several distinct events.

Consider the situation in the image below:

There are three events: A, B, and C. Events B and C are distinct from each other
while event A intersects with both events. We do not know the probability of
event A. However, we know the probability of event A under condition B and
the probability of event A under condition C.

The total probability rule states that by using the two conditional probabilities,
we can find the probability of event A.

>>Formula for the Total Probability Rule:

Mathematically, the total probability rule can be written in the following
equation:

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Where:

• n – the number of events

• Bn – the distinct event

>> The theorem of total probability:

To establish this result, we start with the definition of a partition of a sample
space.

A partition of a sample space

The collection of events A1, A2, . . . An is said to partition a sample space S if

(a) A1 ∪ A2 ∪ · · · ∪ An = S

(b) Ai ∩ Aj = ∅ for all i, j

(c) Ai 6= ∅ for all i

In essence, a partition is a collection of non-empty, non-overlapping subsets of a

sample space whose union is the sample space itself. The definition is illustrated
by Figure (1)

Figure (1)

If B is any event within S then we can express B as the union of subsets:

B = (B ∩ A1) ∪ (B ∩ A2) ∪ · · · ∪ (B ∩ An)

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The definition is illustrated in Figure (2) in which an event B in S is represented
by the shaded region.

Figure (2)

The bracketed events (B ∩ A1), (B ∩ A2) . . . (B ∩ An) are mutually exclusive

(if one occurs then none

of the others can occur) and so, using the addition law of probability for
mutually exclusive events:

P (B) = P (B ∩ A1) + P (B ∩ A2) + · · · + P (B ∩ An)

Each of the probabilities on the right-hand side may be expressed in terms of

conditional probabilities:

P (B ∩ Ai) = P (B | Ai) P(Ai) (for all i)

Using these in the expression for P (B), above, gives:

P (B) = P (B | A1) P (A1) + P (B | A2) P (A2) + · · · + P (B | An) P (An)

This is the theorem of Total Probability. A related theorem with many

applications in statistics can be deduced from this, known as Bayes’ theorem.

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>>Problems based on total probability theorem:
Q1)
An event can occur in two ways only. If the difference of the
probabilities of the two events is 20 %, what are the individual
probabilities of the events?
Solution)

Let us see if the principal of the sum of all probabilities can help us
here. The sum of the two probabilities is 1 or 100%. Their difference
is 0.2 or 20%.
Let us say that A represents the probability of the first event and B
the probability of the second event,
then A + B = 1.
As the event can happen in two ways only. Also,
A – B = 0.2
so that we have two equations.
Adding the two equations together, we get
2 A = 1.2
or
A = 0.6.
Thus A = 60% and B should be 80 % then.

Q2)
Alice is taking a probability class and at the end of
each week she can be either up-to-date or she may have fallen
behind. If she is up-to-date in a given week, the probability that she
will be up-to-date (or behind) in the next week is 0.8 (or 0.2,
respectively). If she is behind in a given week, the probability that
she will be up-to-date (or behind) in the next week is 0.4 (or 0.6,
respectively). Alice is (by default) up-to-date when she starts the

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 class. What is the probability that she is up-to-date after three
weeks?

Solution)

Q3)
• In a certain county

· 60% of registered voters are Republicans

· 30% are Democrats

· 10% are Independents.

• When those voters were asked about increasing military spending

· 40% of Republicans opposed it

· 65% of the Democrats opposed it

· 55% of the Independents opposed it.

• What is the probability that a randomly selected voter in this county

opposes increased military spending?

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Solution)
• Ω = {registered voters in the county}
• R = {registered republicans}, Pr (R) = 0.6
• D = {registered democrats}, Pr (D) = 0.3
• I = {registered independents}, Pr (I) = 0.1
• B = {registered voters opposing increased military
spending}
• Pr (B | R) = 0.4, Pr (B | D) = 0.65, Pr (B | I) = 0.55.
By the total probability theorem:
Pr (B) = Pr (B | R) Pr (R) + Pr (B | D) Pr (D) + Pr (B | I) Pr (I)
= (0.4 · 0.6) + (0.65 · 0.3) + (0.55 · 0.1) = 0.49.

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BAYES’ THEOREM:
In statistics and probability theory, the Bayes’ theorem (also known as the
Bayes’ rule) is a mathematical formula used to determine the conditional
probability of events. Essentially, the Bayes’ theorem describes the probability
of an event based on prior knowledge of the conditions that might be relevant to
the event. The theorem is named after English statistician, Thomas Bayes, who
discovered the formula in 1763. It is considered the foundation of the special
statistical inference approach called the Bayes’ inference.

Besides statistics, the Bayes’ theorem is also used in various disciplines, with
medicine and pharmacology as the most notable examples. In addition, the
theorem is commonly employed in different fields of finance. Some of the
applications include but are not limited to, modelling the risk of lending money
to borrowers or forecasting the probability of the success of an investment.

>>Formula for Bayes’ Theorem

The Bayes’ theorem is expressed in the following formula:

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Where:

• P(A|B) – the probability of event A occurring, given event B has occurred

• P(B|A) – the probability of event B occurring, given event A has occurred
• P(A) – the probability of event A
• P(B) – the probability of event B

Note that events A and B are independent events (i.e., the probability of the
outcome of event A does not depend on the probability of the outcome of event
B).

Example: A bag I contain 4 white and 6 black balls while another Bag II
contains 4 white and 3 black balls. One ball is drawn at random from one of the
bags, and it is found to be black. Find the probability that it was drawn from
Bag I.

Solution: Let E1 be the event of choosing the bag I, E2 the event of choosing
the bag II, and A be the event of drawing a black ball.

Then, P (E1) = P (E2) = 12

Also, P (A | E1) = P (drawing a black ball from Bag I) = 610 = 35

P (A | E2) = P (drawing a black ball from Bag II) = 37

By using Bayes’ theorem, the probability of drawing a black ball from bag I out
of two bags,

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P (E1 | A) = P (E1) P (A | E1) P (E1) P (A│E1) + P (E2) P (A | E2)

=12 × 3512 × 35 + 12 × 37 = 712

A special case of the Bayes’ theorem is when event A is a binary variable.

In such a case, the theorem is expressed in the following way:

Where:

• P(B|A–) – the probability of event B occurring given that event A– has

occurred
• P(B|A+) – the probability of event B occurring given that event A+ has
occurred

In the special case above, events A– and A+ are mutually exclusive outcomes of
event A.

>>Bayes Theorem Derivation

From the definition of conditional probability, Bayes theorem can be derived for
events : P(A|B) = P(A ⋂ B)/ P(B), where P(B) ≠ 0

P(B|A) = P(B ⋂ A)/ P(A), where P(A) ≠ 0

Here, the joint probability P(A ⋂ B) of both events A and B being true such
that,

P(B ⋂ A) = P(A ⋂ B)

P(A ⋂ B) = P(A | B) P(B) = P(B | A) P(A)

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P(A|B) = [P(B|A) P(A)]/ P(B), where P(B) ≠ 0

>>Problems based on Bayes’ theorem:

Q1)
A factory production line is manufacturing bolts using three
machines, A, B and C. Of the total output, machine A is responsible
for 25%, machine B for 35% and machine C for the rest. It is known
from previous experience with the machines that 5% of the output
from machine A is defective, 4% from machine B and 2% from
machine C. A bolt is chosen at random from the production line and
found to be defective. What is the probability that it came from
(a) machine A (b) machine B (c) machine C?
Solution)

Let
D= {bolt is defective},
A= {bolt is from machine A},
B= {bolt is from machine B},
C= {bolt is from machine C}.

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Q2)

An engineering company advertises a job in three newspapers, A, B

and C. It is known that these papers attract undergraduate
engineering readerships in the proportions 2:3:1. The probabilities
that an engineering undergraduate sees and replies to the job
advertisement in these papers are 0.002, 0.001 and 0.005 respectively.
Assume that the undergraduate sees only one job advertisement.

(a) If the engineering company receives only one reply to it

advertisements, calculate the probability that the applicant has seen
the job advertised in place A.

(i) A, (ii) B, (iii) C.

(b) If the company receives two replies, what is the probability that
both applicants saw the job advertised in paper A?

Solution)

Let A = {Person is a reader of paper A},

B = {Person is a reader of paper B},

C = {Person is a reader of paper C},

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R = {Reader applies for the job}.

We have the probabilities

(a) P(A) = 1/3 P(R|A) = 0.002

P(B) = 1/2 P(R|B) = 0.001
P(C) = 1/6 P(R|C) = 0.005

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CONCLUSION:
We often use probability assessments informally in our daily lives to plan or make
decisions. Formal probability theory is a fundamental tool used by researchers,
health-care providers, insurance companies, stockbrokers and many others to
make decisions in contexts of uncertainty.
Probability provides information about the likelihood that something will happen.
Meteorologists, for instance, use weather patterns to predict the probability of
rain. In epidemiology, probability theory is used to understand the relationship
between exposures and the risk of health effects.
There are many examples of how probability is used throughout society. One
common measure is the probability of developing cancer. According to the
Canadian Cancer Society, 40 per cent of Canadian women and 45 per cent of
men will have a diagnosis of an incident of cancer during their lifetimes. These
probabilities are based on calculations from 2009 cancer statistics across the
country.
While this broad information can be useful for those who plan, deliver or
research health-care services, more detailed information is even more helpful.
Researchers can also determine the probability of acquiring specific types of
cancers at specific ages. They can also consider individual factors, which are
important, too.
Probability can fall anywhere from 0 to 1, where 1 means there’s 100 per cent
certainty that the event will occur. Zero means it will not.
So, on a day in which the probability of precipitation was forecast at 80 per cent,
but skies were sunny all day, you also have to consider that there was a 20 per
cent chance that it wouldn’t rain. Still, you made a wise decision to take an
umbrella based on the probability you were given.
In doing this project, I’ve understood what probability is, and the applications of
conditional probability, theorem of total probability and Bayes’ theorem.

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Through the examples and the formulas, I have analysed the method to solve the
problems such as finding the probability of an event occurring etc. Thus, these
theorems are very important, helpful and necessary in solving or finding the
possibility of an event to occur in a more complex case.

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34
 PROJECT-2

A rough sketch on

Revenue (R), Average Revenue (AR) and

Marginal Revenue (MR).

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INTRODUCTION:
In accounting, revenue is the income or increase in net assets that an entity has
from its normal activities (in the case of a business, usually from the sale of goods
and services to customers). In general usage, revenue is income received by an
organization in the form of cash or cash equivalents. Sales revenue is income
received from selling goods or services over a period of time.

In more formal usage, revenue is a calculation or estimation of periodic income

based on a particular standard accounting practice or the rules established by a
government or government agency.

Revenue is the income generated from normal business operations and includes
discounts and deductions for returned merchandise. It is the top line or gross
income figure from which costs are subtracted to determine net income.

Revenue is the income generated from normal business operations and includes
discounts and deductions for returned merchandise. It is the top line or gross
income figure from which costs are subtracted to determine net income.

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REVENUE(R):
Revenue is money brought into a company by its business activities. Revenue is
also known as sales, as in the price-to-sales ratio - an alternative to the price-to-
earnings ratio that uses revenue in the denominator.
There are different ways to calculate revenue, depending on the accounting
method employed. Accrual accounting will include sales made on credit as
revenue for goods or services delivered to the customer. It is necessary to check
the cash flow statement to assess how efficiently a company collects money
owed. Cash accounting, on the other hand, will only count sales as revenue when
payment is received. Cash paid to a company is known as a "receipt". It is possible
to have receipts without revenue. For example, if the customer paid in advance
for a service not yet rendered or undelivered goods, this activity leads to a receipt
but not revenue.
Revenue is known as the top line because it appears first on a company's income
statement. Net income, also known as the bottom line, is revenues minus
expenses. There is a profit when revenues exceed expenses. To increase profit,
and hence earnings per share for its shareholders, a company increases revenues
and/or reduces expenses. Investors often consider a company's revenue and net
income separately to determine the health of a business. It is possible for net
income to grow while revenues remain stagnant because of cost-cutting. Such a
situation does not bode well for a company's long-term growth. When public
companies report their quarterly earnings, the two figures that receive the most
attention are revenues and earnings per share ("earnings" being equivalent to net
income). Subsequent price movement in stocks generally correlates to whether a
company beat or missed analysts' revenue and earnings per share expectations.

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>>Example of Revenue
In the case of government, revenue is the money received from taxation, fees,
fines, inter-governmental grants or transfers, securities sales, mineral or resource
rights, as well as any sales made.
For non-profits, revenues are its gross receipts. Its components include donations
from individuals, foundations, and companies; grants from government entities;
investments; fundraising activities; and membership fees.
In terms of real estate investments, revenue refers to the income generated by a
property, such as rent, parking fees, on-site laundry costs, etc. When the operating
expenses incurred in running the property are subtracted from property income,
the resulting value is net operating income.

>>Concepts of Revenue:

TOTAL REVENUE(TR):
The income earned by a seller or producer after selling the output is called the
total revenue. In fact, total revenue is the multiple of price and output. The
behaviour of total revenue depends on the market where the firm produces or
sells.

Total revenue is the amount of money that a company earns by selling its goods
and/or services during a period of time (e.g., a day or a week). In general,
microeconomic theory assumes that firms attempt to maximize the difference
between total revenues and economic costs.

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TOTAL REVENUE:
One can calculate total revenue by multiplying the price per product by the total
number of units of that product that were sold.

TR = P x Q

Where,
P = Price
Q = Quantity
TR = Total Revenue
Example:
Calculate the total revenue for a firm which is selling 10 television sets at Rs.
21,000 each.
TR = P x Q
= 21,000 x 100
= Rs. 2,10,000

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AVERAGE REVENUE:
Average revenue is referred to as the revenue that is earned per unit of output. It
can also be said that it is the revenue that is obtained by the seller on selling
each unit of the commodity.
Average revenue of a business is obtained by dividing the total revenue with the
total output.
Average revenue is the same as the price as when a seller is selling two units of
the same product at the same price, but if the two products are sold at two
different prices, then the average revenue will be different.
The mathematical formula for calculating average revenue is
AR = TR / Q
Where,
AR = Average Revenue
TR = Total revenue
Q = Output
Example:
What is the average revenue for a firm which is selling 25 units of commodity X
and getting the total revenue of Rs. 2000?
AR = TR/Q
= 2000/25
= 80

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MARGINAL REVENUE(MR):
Marginal revenue (MR) is the increase in revenue that results from the sale of one
additional unit of output. While marginal revenue can remain constant over a
certain level of output, it follows from the law of diminishing returns and will
eventually slow down as the output level increases. In economic theory, perfectly
competitive firms continue producing output until marginal revenue equals
marginal cost.
Thus, marginal revenue is the addition made to the total revenue by selling one
more unit of the good. In algebraic terms, marginal revenue is the net addition to
the total revenue by selling n units of a commodity instead of n – 1.
Thus,
MR = T Rn – TRn-1
Where,
MR = Marginal Revenue24
TR = Total Revenue
n = Unit sold
Example :
By selling 20 units, Firm ABC earned Rs. 200. After selling the 21st unit, firm’s
revenue
increased to 218. What is the marginal revenue in this case?
MR = TR n - TR n-1
= Total revenue by selling 21(n) units - total revenue by selling 20(n-1) units
= 218 - 200 = 18

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>>Relationship among TR, AR and MR
(i) At the outset, Total Revenue (i.e., price x units of the commodity sold)
increases at a diminishing rate with increase in the units of output, since more
units of the commodity can only be sold at a lower price, such that Marginal
Revenue is positive and is downward sloping.
(ii) At the point when TR is maximum MR happens to equal to zero.
(iii) MR becomes negative, when TR decreases with increase in the units of
output.
(iv) MR falls with the fall in AR, but, the rate of decrease in MR is much higher
than that in AR.
(v) MR may be positive, negative or zero, but AR is always positive (since
negative price is illogical)

The above association holds true in case of all forms of imperfect competition
that is, monopoly, duopoly, oligopoly, monopolistic competition, etc. Under
imperfect competition, as a firm lowers the price, the quantity demanded goes
up and average revenue curve slopes downward as a result.

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>>SUMMARY:
FORMULA to calculate TR, AR & MR:

1. TR = P*Q
2. AR = TR/Q
3. MR = TRn - TR n-1

Example:
Calculate the Total Revenue, Marginal Revenue and Average Revenue
Schedules in the Following Table. Market Price of Each Unit of the Good Is Rs
10.
Ans:

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GRAPHICAL REPRESENTATION OF THE CURVES:
We are discussing the relationship between TR, AR and MR with reference to
case -1 (when firm’s AR curve is a horizontal straight line) and case -2 (when
firm’s AR curve is a downward sloping curve).

Case -1

Relationship between TR, AR and MR when firm’s AR curve (or firm’s

demand curve) is a horizontal straight line.

When AR is given to a firm, it implies that AR is constant for a firm.

Constant AR implies that MR should also be constant, and equal to AR. This is
a mathematical fact. Because AR is average value of a series. Average value can
remain constant corresponding to every level of output only when MR (which is
additional revenue or additional value) remains constant corresponding to every
level of output. Thus, in case a firm is facing a demand curve which is a
horizontal straight line, it should represent both its AR as well as MR curve.

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Now, when AR and MR are constant and are equal, corresponding to every
additional unit of output, a firm should be adding a constant amount to its TR
(total revenue).
Thus, firm’s TR should increase at a constant rate (Note: MR is the rate of TR;
constant MR implies that TR increases at a constant rate).

The above graph (a and b) illustrates the behaviour of TR, AR and MR in such
a situation.

Case -2
Relationship between TR, AR and MR when firm’s demand curve slopes
downward.

When AR tends to decline corresponding to every next level of output, MR should

be declining even faster. Reason: average value of a series (AR) will decline only
when additional value (MR) declines faster than the average value. Take an
illustration, as under:

Output AR TR MR

1 10 10 10

2 9 18 8

3 8 24 6

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We find that when AR is declining by 1 unit (corresponding to a unit increase in
output), MR is declining by 2 units. Implying the fact that when AR declines, MR
should be declining faster than AR.

The graph shows the relationship between TR, AR and MR when firm’s demand
curve (AR curve) slopes downward.

Graphical representation of TR, AR, MR curves.

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Observations:
(i) When marginal revenue curve declines till point ‘M’ in part ‘B’, total
revenue is increasing at diminishing rate as shown by the segment O to B in part
‘A’.

(ii) When marginal revenue becomes zero at point ‘M’ in part ‘B’, total
revenue is at its maximum as shown by point ‘B’ in part ‘A’.

(iii) When marginal revenue falls, the average revenue also falls but lies above
the marginal revenue curve. Implying that in a situation of falling price, MR falls
even faster.

(iv) After point ‘M’, marginal revenue becomes negative. Now total revenue
starts diminishing.

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CONCLUSION:
By doing this project I have clearly understood the various revenue functions and
how it is determined by a company.

The term revenue denotes to the receipts obtained by a firm from the scale of
definite quantities of a commodity at various prices. The revenue concept relates
to total revenue, average revenue, and marginal revenue. Total Revenue – It is the
total sale proceeds of a firm by selling a commodity at a given price. Marginal
revenue is the change in total revenue due to selling one more unit of the good.
Average revenue is the price per unit sold.

The revenue function helps to determine the total money or earning earned by a
company in a year. From this they can calculate the profits earned or the losses
made by the company. Once it is calculated the company can take the measures
required to increase or maintain their revenue. The average revenue function
shows the revenue earned per commodity or the money earned by selling one
product. This helps to determine the price and demand of the commodity. A
company can decide the pricing for a product based on the demand for it. The
marginal revenue function helps to determine at what point an organization can
achieve economies of scale to optimise production and overall operations. If the
marginal revenue of producing one additional unit is higher than the per unit
price, the producer has the potential to gain profit.

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BIBLIOGRAPHY
https://wikieducator.org/Revenue_Concepts

https://byjus.com/maths/bayes-theorem/

http://www.stat.yale.edu/Courses/1997-98/101/condprob.htm

https://www.investopedia.com/terms/c/conditional_probability.asp

https://www.microeconomicsnotes.com/revenue

https://www.economicsdiscussion.net/

http://www.opentextbooks.org.hk/

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