Question

State the relationship between AR and MR under perfect competition.

Answer 1

• Under perfect competition, the relationship between Average Revenue (AR) and Marginal Revenue (MR) is AR = MR at all levels of output.
• In perfect competition, a firm sells its product at a constant price.
• This price remains the same regardless of how many units the firm sells.
• Therefore, the revenue from each additional unit (MR) is the same as the average revenue (AR), which is equal to the market price.
• Therefore, the MR and AR curves meet and are horizontal.