Advertisements
Advertisements
Questions
When can AR = MR = Price? Give reasons for your answer.
What is the shape of AR and MR curves under perfect competition?
Why is the AR curve parallel to the X-axis in a perfectly competitive market?
Advertisements
Solution
Average revenue (AR) is equal to price. When a firm can sell additional units of a product without lowering the price, both the average revenue and the price remain unchanged across all levels of output.
On a graph, the AR curve is shown as a horizontal straight line at the price level OP. If each extra unit is sold at the same price, the marginal revenue (MR) from selling one more unit also stays the same. In such cases, MR is equal to AR and also equal to the price.
This condition is true in a perfectly competitive market, where firms are price takers. As a result, AR and MR curves overlap and lie flat at the level of price, no matter how much output is produced.
