How does marginal revenue relate to price in perfect competition?

How does marginal revenue relate to price in perfect competition?

• A. Marginal revenue is unrelated to price.
• B. In perfect competition, marginal revenue equals the price of the good.
• C. Marginal revenue equals marginal cost.
• D. Marginal revenue is always greater than price.

Answer: (B)

In perfect competition, each firm is a price taker, so the price is determined by the market and the firm’s individual demand curve is horizontal at that price. When the firm sells one more unit, it can sell it at the same market price, so the additional revenue from that extra unit—the marginal revenue—is exactly the price. Since price stays constant for each unit, marginal revenue equals price. At the profit-maximizing point, MR equals MC, which in this setting means price equals marginal cost as well. The other ideas aren’t correct because marginal revenue isn’t unrelated to price, isn’t generally equal to marginal cost except at the optimum, and isn’t always greater than price.

In perfect competition, each firm is a price taker, so the price is determined by the market and the firm’s individual demand curve is horizontal at that price. When the firm sells one more unit, it can sell it at the same market price, so the additional revenue from that extra unit—the marginal revenue—is exactly the price. Since price stays constant for each unit, marginal revenue equals price. At the profit-maximizing point, MR equals MC, which in this setting means price equals marginal cost as well. The other ideas aren’t correct because marginal revenue isn’t unrelated to price, isn’t generally equal to marginal cost except at the optimum, and isn’t always greater than price.