Question

What are the shapes of AR and MR curves, when each unit is sold at the same price?

Hint:

In perfect competition, both AR and MR curves are horizontal because each unit is sold at the same price.

Answer 1

Step 1: Defining AR and MR Curves:
- AR Curve (Average Revenue): In any market, the Average Revenue (AR) curve represents the revenue per unit of output sold, and it is equal to the price at which the good is sold. In perfect competition, where each unit is sold at the same price, the AR curve is a horizontal straight line. This is because the price remains constant no matter how much of the good is sold.
- MR Curve (Marginal Revenue): The Marginal Revenue (MR) curve shows the additional revenue from selling one more unit of a good. In perfect competition, MR is also constant and equal to the price because each additional unit of output adds the same amount of revenue as the price. The MR curve is also a horizontal line, coinciding with the AR curve.
Step 2: Shapes of AR and MR in Perfect Competition:
When each unit is sold at the same price, as in perfect competition, both the AR and MR curves are horizontal lines. This reflects the fact that the firm can sell any quantity at the same price without affecting the price level. Therefore, the AR curve is flat (horizontal) at the level of the market price, and the MR curve coincides with the AR curve.
Step 3: Final Conclusion:
In perfect competition, both the AR and MR curves are horizontal straight lines, reflecting the constant price at which each unit is sold.