Question

Which of the following is true about the marginal revenue of a firm in a perfectly competitive industry?

		It is constant.
		It increases as output sold increases.
		It decreases as output sold increases.
		It increases at first, then decreases.
		It decreases at first, then increases.

Answer 1

A perfect competitive firms are price takers and thus will always have to charge price determined by a market and thus they faces perfect elastic or horizontal demand curve where P = Market price and is fixed and independent of quantity

MR = Marginal Revenue = d(TR)/dQ = d(P*Q)/dQ = P(dQ/dQ) = P => MR = P

where TR = Total revenue = P*Q, P = price and Q = quantity.

So, we have for a perfect competitive firm MR = P where P is constant and independent of output.

So, MR is constant and independent of output and thus option (a) is the correct answer.

Hence, the correct answer is (a) It is constant.