The demand curve faced by a perfectly competitive firm
A is identical to the market demand curve.
B yields constant total revenues even when price changes.
C is the same as its marginal revenue curve.
D has unitary elasticity.
The correct answer and explanation is :
The correct answer is:
C. The demand curve faced by a perfectly competitive firm is the same as its marginal revenue curve.
Explanation:
In a perfectly competitive market, a firm is a price taker, meaning it cannot influence the market price. The firm accepts the market price as given and adjusts its output level accordingly. In such a market, the firm’s demand curve is perfectly elastic at the market price. This means that the firm can sell any quantity of output at the market price, but it cannot sell at a higher price.
- Demand Curve = Marginal Revenue Curve:
In perfect competition, the price at which the firm can sell its product is constant regardless of the quantity it produces. Because the firm is a price taker, its marginal revenue (MR) is always equal to the price of the good. For each additional unit sold, the revenue increases by the same amount (the price). This results in the marginal revenue curve being identical to the demand curve faced by the firm. If the firm is producing a certain quantity, the total revenue will increase by the price of the good for each additional unit sold. - Why the other options are incorrect:
- A. The demand curve faced by a perfectly competitive firm is identical to the market demand curve: This is false. The market demand curve represents the relationship between price and quantity demanded in the entire market, while the firm’s demand curve is perfectly elastic at the market price. The firm faces a horizontal demand curve at the market price, not the entire market demand curve.
- B. The demand curve yields constant total revenues even when price changes: This is false because, in perfect competition, price changes lead to changes in the firm’s total revenue. However, price remains constant for the individual firm at the market price, so this is not an issue.
- D. The demand curve has unitary elasticity: This is false for a perfectly competitive firm. The firm’s demand curve is perfectly elastic, not unitary elastic. Unitary elasticity refers to a situation where the percentage change in quantity demanded equals the percentage change in price, which is not the case for a perfectly competitive firm.