Question

In which of the following market conditions is the Average Revenue curve more elastic?

• A. Monopoly
• B. Monopolistic competition
• C. Perfect competition
• D. None of these

Hint:

In perfect competition, the AR curve is horizontal and perfectly elastic, indicating that firms can sell any quantity at the given price.

Answer 1

The Correct Option is C

Step 1: Understanding Average Revenue (AR):
Average Revenue is the revenue per unit of output, and it is calculated by dividing total revenue by the number of units sold. The elasticity of the AR curve refers to how sensitive the average revenue is to changes in quantity or price.
Step 2: Analyzing Market Structures:
- Monopoly: In a monopoly, the firm controls the entire supply of the product, and the AR curve is relatively inelastic because the firm can set prices above marginal cost.
- Monopolistic competition: In monopolistic competition, firms have some control over price, but the AR curve is more elastic than in a monopoly due to the availability of close substitutes.
- Perfect competition: In perfect competition, firms are price takers and cannot influence the price. The AR curve is perfectly elastic because the firm can sell any amount of output at the market price. Since firms cannot increase the price without losing customers, the AR curve is horizontal and highly elastic.
Step 3: Conclusion:
The AR curve is most elastic in perfect competition, making option (C) the correct answer.