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IAI Actuarial Core Principles · Business Economics · Production, costs, revenue and profit in price and output decisions

A firm in a perfectly competitive market sells each unit at a market price of ₹40 whatever quantity it sells. Which statement about its revenue curves is correct?

Average revenue and marginal revenue both equal ₹40. A price taker sells every unit at the same market price, so each extra unit adds the price to total revenue, and the demand curve facing the firm is horizontal at that price.

  1. AAverage revenue is ₹40 and marginal revenue is below ₹40 and falling
  2. BAverage revenue and marginal revenue are both ₹40, so the demand curve facing the firm is horizontalCorrect
  3. CMarginal revenue is ₹40 but average revenue falls as output rises
  4. DTotal revenue is constant at ₹40 whatever the output
  5. Marginal revenue is zero because price does not change

Explanation

A price taker can sell any quantity at the market price, so each extra unit adds exactly the price. Thus AR = MR = ₹40 and the firm's demand curve is horizontal. Total revenue rises in proportion to output rather than staying constant.

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