Price and marginal revenue are identical for an individual purely competitive seller.
The Correct Answer and Explanation is:
Correct Answer: True
In a purely competitive market, price and marginal revenue are identical for an individual seller. This is one of the fundamental characteristics of perfect competition.
In perfect or pure competition, there are many buyers and sellers, and none of them has any influence over the market price. All firms sell a homogeneous product, meaning the goods are perfect substitutes. Because of this, each firm is a price taker, which means they must accept the market price determined by the forces of supply and demand. They cannot raise their price without losing all their customers to competitors, and there is no reason to lower the price since they can sell any amount of their product at the prevailing market price.
Marginal revenue is the additional revenue that a firm earns by selling one more unit of output. In a purely competitive market, since each unit is sold at the same market price, the revenue gained from selling one additional unit is equal to that market price. Therefore, marginal revenue remains constant and is equal to the price.
For example, if the market price of a product is $10, and a firm sells one unit, it earns $10. If it sells two units, the total revenue is $20. The marginal revenue — the change in total revenue from selling the second unit — is also $10. Since this holds true for all units sold, price equals marginal revenue.
This concept is important because it affects a firm’s output decision. A competitive firm maximizes profit by producing the quantity of output where marginal cost equals marginal revenue. Since marginal revenue equals price in perfect competition, the profit-maximizing condition becomes marginal cost equals price.
In summary, for a purely competitive seller, the market dictates the price, and the seller’s marginal revenue from each additional unit is exactly the same as that price.
