In a perfectly competitive market, the price that the firm faces from supply and demand is also equal to:
A) average variable cost.
B) marginal revenue and average revenue.
C) average revenue but never marginal revenue.
D) long run average cost in the short run.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, the firm is a price taker, which means that it cannot influence the market price. Thus, the price that the firm faces is equal to the market price. Since the demand curve is perfectly elastic for the individual firm, its marginal revenue (MR) equals the market price. Also, since the firm can sell any amount it wants at the market price without affecting the price, its average revenue (AR) is equal to the market price as well. Therefore, in a perfectly competitive market, the price that the firm faces is equal to both marginal revenue and average revenue.

In a Perfectly Competitive Market, the Price That the Firm