Question

‘The MR curve of a firm cannot be above its AR curve.’ Comment.

Answer 1

This statement is correct and grounded in the fundamental principles of microeconomic theory. Let’s break it down:

1. Understanding AR and MR:
   • Average Revenue (AR) = Total Revenue ÷ Quantity = Price per unit.
   • Marginal Revenue (MR) = Change in Total Revenue when one more unit is sold.
2. Why MR Cannot Be Above AR:
   
   • The AR curve represents the price at which each unit is sold.
   • The MR curve shows the additional revenue gained from selling one more unit.
   • In most market conditions, especially imperfect competition, the firm must lower its price to sell more units. This means: The AR falls as output increases. The MR falls faster than the AR because the firm earns less from all previous units when the price is reduced.

Illustration (Monopoly or Monopolistic Competition)

Quantity	Price (AR) (in ₹)	Total Revenue (TR) (in ₹)	Marginal Revenue (MR) (in ₹)
1	10	10	10
2	9	18	8
3	8	24	6

Geometric Explanation: AR and MR are equal only under perfect competition, where price is constant. In all other market structures, MR lies below AR, hence can never be above it.