In a perfectly competitive market, what is the relationship between marginal revenue and the market price?

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Prepare for the OnRamps Economics College Exam with detailed multiple-choice questions and explanations. Strengthen your understanding and boost your performance!

Multiple Choice

In a perfectly competitive market, what is the relationship between marginal revenue and the market price?

Explanation:
In a perfectly competitive market, firms are price takers and face a horizontal demand curve at the market price. The revenue from selling one more unit is simply the market price, so the marginal revenue equals price. Since total revenue is TR = P × Q and price is constant, MR = d(TR)/dQ = d(PQ)/dQ = P. So marginal revenue equals the market price. This is why the MR curve is a horizontal line at the price. In other market structures, adding output can require lowering the price on all units, so MR can be below price, but not in perfect competition.

In a perfectly competitive market, firms are price takers and face a horizontal demand curve at the market price. The revenue from selling one more unit is simply the market price, so the marginal revenue equals price. Since total revenue is TR = P × Q and price is constant, MR = d(TR)/dQ = d(PQ)/dQ = P. So marginal revenue equals the market price. This is why the MR curve is a horizontal line at the price. In other market structures, adding output can require lowering the price on all units, so MR can be below price, but not in perfect competition.

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