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Chapter 21: Problem 32

The perfect competitor's demand and marginal revenue curves are \((\mathrm{LO5})\) a) identical only in the long run b) identical only in the short run c) never identical d) always identical

Short Answer

Expert verified
In a perfectly competitive market, the demand curve faced by an individual firm is horizontal at the market price, as they can sell as much as they want at that price. The marginal revenue curve is also horizontal at the market price. Therefore, in perfect competition, the demand and marginal revenue curves of an individual firm are always identical. The correct answer is (d) always identical.

Step by step solution

01

Define Demand and Marginal Revenue

Demand refers to the relationship between the quantity of a good that consumers are willing and able to buy and the price of that good. A demand curve shows this relationship graphically. Marginal revenue, on the other hand, refers to the additional revenue generated when a firm sells an additional unit of a good or service. It is the change in total revenue divided by the change in the quantity of output sold.
02

Characteristics of Perfect Competition

Perfect competition is a market structure characterized by the following features: (1) many buyers and sellers, (2) identical products, (3) perfect information, (4) no barriers to entry or exit, and (5) price-taking behavior. In a perfectly competitive market, firms cannot influence the market price, so they can sell as much as they want at the market price.
03

Relationship between Demand and Marginal Revenue in Perfect Competition

In a perfectly competitive market, the demand curve faced by an individual firm is horizontal at the market price. Since a perfectly competitive firm can sell as much as they want at the market price, the marginal revenue curve is also horizontal at the market price. Therefore, in perfect competition, the demand and marginal revenue curves are identical for an individual firm.
04

Conclusion

Given this understanding of perfect competition and the relationship between demand and marginal revenue in this market structure, the correct answer to the exercise is: d) always identical

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Most popular questions from this chapter

At an output of \(5, \mathrm{MC}=\$ 49\) and ATC \(=\$ 52\). At an output of \(6, \mathrm{MC}=\$ 59\) and ATC \(=\$ 53\). At the breakeven point, ATC is (LO6) a) above \(\$ 53\) b) \(\$ 53\) c) between \(\$ 52\) and \(\$ 53\) d) \(\$ 52\) e) less than \(\$ 52\)

In the long run the perfect competitor will \- (LO5) a) make a profit b) break even c) take a loss

The perfect competitor's demand curve is (LO4) a) always horizontal b) always vertical c) sometimes horizontal d) sometimes vertical

In the short run the perfect competitor will probably (LO5) a) make a profit or break even b) take a loss or break even c) make a profit or take a loss

The most efficient output (LO7) a) is always equal to the most profitable output for the perfect competitor b) is never equal to the most profitable output for the perfect competitor c) is equal to the most profitable output for the perfect competitor only in the long run d) is equal to the most profitable output for the perfect competitor only in the short run
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