Question

8) For a perfectly competitive firm, marginal revenue is

A) equal to the price.

B) less than the price.

C) undefined because the firm's demand curve is horizontal.

D) greater than the price.

and

10) A perfectly competitive firm will maximize profit when the quantity produced is such that the

A) firm's marginal revenue is equal to its marginal cost.

B) price exceeds the firm's marginal cost by as much as possible.

C) firm's marginal revenue exceeds its marginal cost by the maximum amount possible.

D) firm's total revenue is equal to total cost.

Answer 1

8.Equals to price

Marginal revenue is equal to price because in a perfect competition market each firm is a price taker and hence the demand is perfectly elastic. A firm can sell any amount of output at the same price decided by market forces of demand and supply.

9. Firm's marginal revenue is equal to marginal cost.

A firm undet perfect competition maximizes profit when quantity produced is such that the marginal revenue of the firm is equal to its marginal cost. When marginal revenue is more than marginal cost then additional unit of output will add more to profit and firm will keep producing until marginal cost equals marginal revenue.  If output level is increased beyond this then profit starts declining because marginal cost becomes more than marginal revenue. So profit is maximized when marginal revenue is equal to marginal cost.