Answer to Question #131010 in Microeconomics for yasir

Question

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

Answer 1

The equilibrium of the firm, its stable position in the industry is achieved when marginal revenue and marginal costs are equal. It should be borne in mind that the marginal income itself is equal to the price of the goods. This happens because an increase in the supply of a product by an extremely small amount (unit) gives an increase in income, and this will add to the total revenue the price of one product. This means that marginal income is equal to the price of a commodity.

So, the equilibrium of the firm, in which it chooses the optimal output, assumes the following equality: MR = AR = P.