Below is a demand schedule facing an individual firm. Complete the table by computing average revenue, total revenue, and marginal revenue. Then draw graphs and answer the following two questions:
Quantity Average Total Marginal Price Demanded revenue revenue revenue
$50 0 $0 $0
$50 1 $50 $50
$50 2 $100 $50
$50 3 $150 $50
$50 4 $200 $50
$50 5 $250 $50
$50 6 $300 $50
(a) How can you tell whether a firm is operating in a market that is purely competitive?
The data indicate that the demand curve for this individual firm is perfectly elastic. Therefore, the firm is operating in a purely competitive market because it can sell all of its output at the going market price of $50. Product price is constant for the firm under pure competition.
(b) What relationship exists between average revenue and marginal revenue?
Marginal revenue (MR) and average revenue (AR) are not the same under pure competition. Marginal revenue and average revenue are also equal at a constant price of $50. Because the seller must pay a constant amount per unit ($50), the revenue per unit (or average revenue) is also equal to the price.