Q. 5  (a)     What is the relationship among a firms total revenue, profit and total cost? How

               Are they related?

Ans.           Total profit is the difference between total Revenue and Total Cost.

Profit =TR-TC

In terms of total revenue and total cost curves , Total profit of the firms is maximum at an output level where positive difference between total Revenue and total cost is maximum. This difference can found by drawing tangent on the two curves. The point where these tangents are parallel shows the maximum profit for the firm. So in terms of marginal revenue and marginal cost, a firm earns maximum profit where MR=MC

 

(b)   How do economists measure profitability? Explain in detail.

Ans: Economist measures total profit as given in the following equation

Total Profit = Total Revenue-Total Explicit Cost-Total Implicit Cost