Question

Under perfect competition, the demand curve facing a firm and the firm's marginal revenue curve are...

Under perfect competition, the demand curve facing a firm and the firm's marginal revenue curve are

a.

vertical at the firm's chosen output level
b.

both vertical, but the demand curve is further to the right than the marginal revenue curve
c.

both vertical, but the marginal revenue curve is further to the right than the demand curve
d.

both horizontal, but the demand curve is above the marginal revenue curve
e.

both horizontal at the level of the market price
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Answer #1

answer is: e. both horizontal at the level of market price

Since the firm under perfect competition is a price taker, it can sell any amount of output at the same per unit price(average revenue or AR). This also means revenue obtained from sale of each additional unit(marginal revenue or MR) will be same as AR i.e., MR=AR. Demand curve faced by such a firm will be perfectly elastic i.e., horizontal and parallel to the x axis and same as MR and AR or market price level.

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