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

A firm sells every unit of its output at the same market price of Rs 40, whatever quantity it sells. Which statement about its revenue curves is correct?

Both average revenue and marginal revenue equal Rs 40 at every output. A price-taking firm sells each extra unit at the same price, so each unit adds Rs 40 to total revenue, and total revenue divided by quantity is also Rs 40.

  1. AAverage revenue is Rs 40 and marginal revenue is below Rs 40 at every output
  2. BAverage revenue and marginal revenue are both Rs 40 at every outputCorrect
  3. CMarginal revenue is Rs 40 but average revenue falls as output rises
  4. DTotal revenue is constant at Rs 40 whatever the output
  5. Marginal revenue is zero because price does not change

Explanation

When price is fixed, each extra unit adds exactly the price to total revenue, so marginal revenue equals price. Average revenue is total revenue divided by quantity, which is also the price. The option saying marginal revenue is below price describes a downward-sloping demand curve, not a price taker.

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