Question

State the relation between marginal revenue and average revenue.

What is the relation between AR and MR under imperfect competition? 

Why is the MR curve below the AR curve under imperfect competition? 

Answer 1

The relationship between MR and AR can be explained through two forms of market, i.e., perfect competition market and imperfect competition market.

• Under the perfect competition market, AR is equal to MR at all levels of output. Hence, the MR curve is a straight horizontal line parallel to the X-axis and coinciding with the AR curve.
  
• Under the imperfect competition market, as the output or sales increase, both AR and MR curves decline. The Marginal Revenue (MR) curve lies below the Average Revenue (AR) curve because the firm must reduce the price to sell additional units. However, AR remains greater than MR at all levels of output. Also, when AR becomes zero, the MR will be negative.