Q5 of 14 Page 4

Why is AR always equal to MR for a competitive firm?

Perfectly competitive markets are those industry structures wherein a firm believes that it is capable of selling as many number of units of a certain good as it wishes by setting one price that is equivalent to or lesser in comparison to the market price. Under perfect competition, marginal revenue remains equivalent to average revenue as all goods tend to be sold at the same price in the market, whereby industry represents the price maker while firm represents the price taker. With sale of every extra unit of the product, extra revenue or marginal revenue as well as the average revenue will turn equal to the price. Hence, both average revenue (AR) in addition to the marginal revenue (MR) will be equal to one another.


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