Question

Why is average revenue (AR) equal to marginal revenue (MR) for a competitive firm?

Answer 1

Solution:

The reason why the average revenue (AR) is equal to marginal revenue (MR) is that the firm is operating in a perfectly competitive market. Hence, the price remains constant over varying output levels. Equality is a consequence of perfect competition where firms are price takers; that is, the firm cannot influence the prices, and any amount of a product is sold at the given price. Due to the many firms under a perfectly competitive market, a firm will lose customers should it sell its products above the set market price. Furthermore, it doesn’t have the incentive to also sell below the set market price.