Marginal revenue for a purely competitive firm:
a. is greater than price.
b. is less than price.
c. is equal to price.
d. may be either greater or less than price.
The correct answer and explanation is :
The correct answer is c. is equal to price.
Explanation:
In a purely competitive market, firms are price takers, meaning they cannot influence the market price and must accept the prevailing price as given. The key characteristics of a purely competitive market include:
- Many Sellers and Buyers: There are numerous firms and buyers in the market, each of which is too small to influence the overall market price.
- Homogeneous Products: The products sold by firms are identical or nearly identical, so buyers have no preference for one firm’s product over another.
- Free Entry and Exit: Firms can enter or exit the market freely, which ensures that in the long run, firms only earn normal profits (i.e., no economic profit).
Now, focusing on the relationship between marginal revenue (MR) and price in a purely competitive market:
- Marginal Revenue (MR) is the additional revenue a firm earns from selling one more unit of output.
- In a purely competitive market, the firm faces a perfectly elastic demand curve at the market price. This means that the firm can sell any quantity of output at the prevailing market price, but it cannot influence the price by altering its output.
Since the firm can sell additional units of output at the same price, the marginal revenue it receives from selling one more unit is exactly equal to the price at which it is selling the product.
- MR = Price: For a competitive firm, marginal revenue is always equal to the price because each additional unit of output is sold at the same price.
In contrast, for firms in monopolistic or monopolistic competitive markets, the marginal revenue typically decreases with each additional unit sold, as the firm has to lower the price to sell more units. This is because these firms have some degree of market power.
Therefore, in a purely competitive market, marginal revenue is equal to price because firms are price takers and each additional unit is sold at the same price.