Question

For a perfectly competitive firm, marginal revenue is identical to

Select one:

a. a and c above

b. marginal cost at every quantity.

c. all of the above

d. average cost at every quantity.

e. price at every quantity. (wrong)

Answer 1

The competitive firm is a price taker. So, its production function will have no effect on the price of the good. The demand curve d facing an individual competitive firm is given by a horizontal line, which corresponds to the price (p) of the good. Now, if the quantity sold is increased by the firm, it will have no impact on the market price. Price is determined by the interaction of all firms and consumers in the market and not the output decision of a single firm. By the same logic, when the individual firm faces a horizontal demand curve, it can sell one additional unit of the good without lowering the price. As a result, when the firm sells an additional unit, the firm’s total revenue increases by the amount equal to price. Thus, marginal revenue is also constant at price (p).

So, for a perfectly competitive firm, marginal revenue is identical to price at every quantity (Option E).