Suppose that a firm operating in perfectly competitive market sells 200 units of output at a price of $3 each. Which of the following statements is correct? (i)
Marginal revenue equals $3.
(ii)
Average revenue equals $600.
(iii)
Average revenue exceeds marginal revenue, but we don't know by how much.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, firms are price takers and the market sets the price. Therefore, the firm can sell any quantity of output at the market price of $3. Marginal revenue is the additional revenue generated by selling one more unit of output, and in a perfectly competitive market, it is equal to the market price. So marginal revenue equals $3.

Average revenue, on the other hand, is the total revenue divided by the quantity sold. In this case, the firm sells 200 units at $3 each, so the total revenue is 200 x $3 = $600. Therefore, average revenue is $600/200 = $3, which is equal to the market price and marginal revenue.

Option (iii) is incorrect because, as explained above, marginal revenue equals average revenue in a perfectly competitive market.

Suppose That a Firm Operating in Perfectly Competitive Market Sells