Question

When average revenue equals marginal revenue at all levels of output, the market structure is:

• A. Monopoly
• B. Oligopoly
• C. Perfect Competition
• D. Monopolistic Competition

Hint:

Perfect Competition: \[ P = AR = MR \]

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
Revenue is the income received by a firm from the sale of its goods.
- Average Revenue (AR): Total Revenue divided by Quantity. It represents the Price (P) per unit.
- Marginal Revenue (MR): The change in Total Revenue from selling an additional unit of output.
Step 2: Detailed Explanation:
In Perfect Competition:
1. There are a large number of buyers and sellers selling homogeneous products.
2. No single seller is large enough to influence the market price; they are all "Price Takers."
3. The price is determined by the market forces of demand and supply.
4. Since the firm can sell any amount at the prevailing market price, the price remains constant for every unit.
5. Because Price (P) is constant:
\[ AR = \frac{P \times Q}{Q} = P \]
\[ MR = \frac{\Delta (P \times Q)}{\Delta Q} = P \]
Thus, \(P = AR = MR\) at all levels of output.
The demand curve (AR curve) for a perfectly competitive firm is a horizontal straight line parallel to the X-axis.
In Imperfect Competition (Monopoly, Monopolistic Competition):
Firms must lower prices to sell more units. This leads to \(MR\) falling faster than \(AR\), so \(AR>MR\).
Step 3: Final Answer:
The condition \(AR = MR\) only holds true under Perfect Competition.