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Question
What is the relation between marginal revenue and average revenue under perfect competition?
Short Answer
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Solution
Under perfect competition, marginal revenue and average revenue are equal.
- In perfect competition, a firm is a price taker, meaning it can sell any quantity of output at the market-determined price.
- As a result, average revenue (AR), which is total revenue divided by quantity (AR = TR/Q), equals the price.
- Similarly, marginal revenue (MR), which is the additional revenue from selling one more unit, is also equal to the price.
AR = MR = Price
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