This business/management problem is solved step by step below, with detailed explanations to help you understand the method and arrive at the correct answer.
ScanSolve AI Answer
In a perfectly competitive market, individual firms are price takers because there are many small firms selling identical products, and no single firm can influence the market price. Here's how a firm's demand and revenue curves behave: Step 1: Firm's Demand Curve For an individual firm in perfect competition, the demand curve is perfectly elastic, meaning it is a horizontal line at the prevailing market price. This is because the firm can sell any quantity of its product at the market price, but if it tries to charge even a slightly higher price, it will lose all its customers to competitors. Step 2: Revenue Curves Total Revenue (TR): This is the total income a firm receives from selling its output. TR = Price (P) × Quantity (Q) Since the price is constant for the firm, TR increases proportionally with the quantity sold. Average Revenue (AR): This is the revenue per unit of output sold. AR = TR / Q = (P × Q) / Q = P Thus, the average revenue curve is identical to the firm's demand curve, which is the market price. Marginal Revenue (MR): This is the additional revenue gained from selling one more unit of output. MR = Change in TR / Change in Q In perfect competition, since the firm sells each additional unit at the constant market price, the marginal revenue is always equal to the price. MR = P Therefore, for a perfectly competitive firm, the demand curve, average revenue curve, and marginal revenue curve are all the same horizontal line at the market price: Demand = AR = MR = P. Step 3: Diagram Explanation Imagine a graph with Quantity on the horizontal (X) axis and Price/Revenue on the vertical (Y) axis. The firm's demand curve (D), average revenue curve (AR), and marginal revenue curve (MR) are represented by a single horizontal line at the market price (P). This line indicates that the firm can sell any quantity at this fixed price. The total revenue curve (TR) starts from the origin (0,0) and slopes upwards in a straight line. Its slope is constant and equal to the market price, reflecting that total revenue increases linearly with each additional unit sold at the constant market price. What's next? Send 'em.