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Under which of the following market structure AR of the firm will be equal to MR?
- a)Monopoly
- b)Monopolistic competition
- c)Oligopoly
- d)Perfect Competition
Correct answer is option 'D'. Can you explain this answer?
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Under which of the following market structure AR of the firm will be e...
Perfect Competition:
In a perfectly competitive market structure, AR (Average Revenue) of the firm will be equal to MR (Marginal Revenue). This is because in perfect competition, the firm is a price taker and faces a horizontal demand curve at the prevailing market price. This means that the firm can sell any quantity of output at the market price, without affecting the price.
Explanation:
- In perfect competition, since the firm faces a horizontal demand curve, the AR curve is also horizontal and equal to the market price.
- The MR curve in perfect competition is also horizontal and coincides with the AR curve. This is because in perfect competition, the firm can sell additional units of output at the same market price.
- Therefore, in perfect competition, AR is equal to MR at all levels of output.
Implications:
- Since AR is equal to MR in perfect competition, the firm maximizes profit by producing at the level of output where MR equals MC (Marginal Cost).
- If the firm produces at a level where MR is greater than MC, it can increase profits by producing more. If MR is less than MC, the firm can increase profits by reducing output.
- In the long run, in perfect competition, firms earn normal profits as there are no barriers to entry or exit, and economic profits are competed away.
In conclusion, in perfect competition, AR of the firm will be equal to MR due to the characteristics of the market structure where firms are price takers and face a horizontal demand curve.
In a perfectly competitive market structure, AR (Average Revenue) of the firm will be equal to MR (Marginal Revenue). This is because in perfect competition, the firm is a price taker and faces a horizontal demand curve at the prevailing market price. This means that the firm can sell any quantity of output at the market price, without affecting the price.
Explanation:
- In perfect competition, since the firm faces a horizontal demand curve, the AR curve is also horizontal and equal to the market price.
- The MR curve in perfect competition is also horizontal and coincides with the AR curve. This is because in perfect competition, the firm can sell additional units of output at the same market price.
- Therefore, in perfect competition, AR is equal to MR at all levels of output.
Implications:
- Since AR is equal to MR in perfect competition, the firm maximizes profit by producing at the level of output where MR equals MC (Marginal Cost).
- If the firm produces at a level where MR is greater than MC, it can increase profits by producing more. If MR is less than MC, the firm can increase profits by reducing output.
- In the long run, in perfect competition, firms earn normal profits as there are no barriers to entry or exit, and economic profits are competed away.
In conclusion, in perfect competition, AR of the firm will be equal to MR due to the characteristics of the market structure where firms are price takers and face a horizontal demand curve.
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Under which of the following market structure AR of the firm will be equal to MR?a)Monopolyb)Monopolistic competitionc)Oligopolyd)Perfect CompetitionCorrect answer is option 'D'. Can you explain this answer?
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