The demand curve facing a perfectly competitive firm is:
Select correct option:
A The same as its average revenue curve but not the same as its marginal revenue curve.
B The same as its average revenue curve and its marginal revenue curve.
C The same as its marginal revenue curve but not its average revenue curve.
D Not the same as either its marginal revenue curve or its average revenue curve.
The correct answer is:
B) The same as its average revenue curve and its marginal revenue curve.
Explanation:
In a perfectly competitive market, the demand curve facing an individual firm is perfectly elastic at the market price. This means that the firm can sell any quantity of output at the given price, but cannot influence the price. The price is determined by the overall market supply and demand.
For a perfectly competitive firm:
- Average Revenue (AR) is the total revenue divided by the quantity of output sold. Since the firm can sell all of its output at the same price (market price), the average revenue is equal to the price. Mathematically, this is:
[
AR = \frac{TR}{Q} = P
]
where ( TR ) is total revenue, ( Q ) is the quantity of output, and ( P ) is the price. This means that average revenue is simply a horizontal line at the price level, which coincides with the demand curve. - Marginal Revenue (MR) is the additional revenue the firm receives from selling one more unit of output. Since the price remains constant in perfect competition (because the firm is a price taker), the marginal revenue is also equal to the price of the product. Mathematically:
[
MR = \frac{\Delta TR}{\Delta Q} = P
]
Hence, marginal revenue is also a horizontal line at the market price.
Since both the average revenue curve and the marginal revenue curve are horizontal lines at the market price, they are identical, and the demand curve faced by the firm is the same as both these curves. The firm can sell any amount at this price, but cannot charge a higher price due to competition.
Visual Representation:
Let me generate a graph to represent this scenario.
