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

For a firm facing a downward-sloping demand curve that charges one price to all customers, which relationship between average revenue (AR) and marginal revenue (MR) holds?

Marginal revenue lies below average revenue at every positive output. To sell one more unit at a single price, the firm must cut the price on all units, so the revenue gained from the extra unit is less than the price it receives.

  1. AMR lies above AR at every output
  2. BMR equals AR at every output
  3. CMR lies below AR at every positive outputCorrect
  4. DMR lies below AR only when total revenue is falling
  5. MR is always constant while AR falls

Explanation

AR is the price. To sell an extra unit the firm must lower the price on all units, so the extra revenue is the new price less the revenue lost on earlier units. Hence MR < AR at every positive output.

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