Question

If a perfectly competitive firm sells 10 units of output at a price of \(\$ 10\) per unit, its marginal revenue per unit is (LO1) a) \(\$ 1\) d) more than \(\$ 1\), but less b) \(\$ 10\) than \(\$ 10\) c) \(\$ 100\) e) more than \(\$ 10\), but less than \(\$ 100\)

Short answer

In a perfectly competitive market, firms are price takers and the marginal revenue per unit is equal to the market price. In this case, the firm sells 10 units of output at a price of $10 per unit, so the marginal revenue per unit is \( \$ 10\). Therefore, the correct answer is b) \( \$ 10\).

Step-by-step solution

Understanding the concept of marginal revenue in perfect competition

In a perfectly competitive market, every firm sells its product at the prevailing market price. Perfect competition requires that firms are price takers, meaning they have to accept the market price for their product. Under these market conditions, the demand curve facing the firm is perfectly elastic, i.e., it is a horizontal line. As such, when a firm sells an extra unit of output, the additional (marginal) revenue is equal to the market price.

Calculate the marginal revenue

In this problem, the firm sells 10 units of output at a price of $10 per unit. Thus, since the firm is in perfect competition, the marginal revenue per unit is equal to the price per unit.

Select the correct answer

Based on the calculation above, we find that the marginal revenue per unit is equal to the price per unit, which is $10 in this case. Hence, the correct answer is: b) $10

Key concepts

Marginal Revenue

In a perfectly competitive market, each firm faces a unique situation where its marginal revenue is directly linked to its selling price. Marginal revenue represents the additional income that a firm earns from selling one more unit of its product.
In perfect competition, every firm must accept the current market price for its product because there are so many firms offering identical goods. This means the firm's demand curve is perfectly elastic.
This implies two things:

• First, the firm can sell as much as it can produce at the market price without affecting it.
• Secondly, for each unit sold, the additional revenue (or marginal revenue) that the firm receives is the same as the price.

So if the market price is $10, the marginal revenue will also be $10 for each of the units sold. No matter how many units are sold, every added unit continues to bring in $10 in revenue. This simple equation, where price equals marginal revenue, is a fundamental characteristic of a perfectly competitive market.

Price Takers

Firms operating under perfect competition are known as price takers. This term describes a situation where individual firms cannot influence the price of their product. In contrast to monopolists, who can set their prices due to lack of competition, firms in perfect competition must accept the market price that's set by the overall supply and demand dynamics.
In such markets, firms are surrounded by countless other competitors selling a virtually identical product. Hence, trying to charge a higher price would drive customers to other firms, leading to a loss of sales.
The sheer number of buyers and sellers ensures that the market price remains stable, and individual actions by one firm have no noticeable impact on the market as a whole. Price-taking firms often focus on operating efficiency to maintain competitive pricing without sacrificing profit.

Elastic Demand Curve

The demand curve that perfectly competitive firms face is perfectly elastic. A perfectly elastic demand curve is represented graphically as a horizontal line. This happens because any slight change in price would cause consumers to switch products or suppliers. Therefore, a small change in price results in an infinite change in quantity demanded.
For perfectly competitive firms, this means they must sell their goods at the ongoing market price or risk losing all their customers, since buyers have open access to identical goods offered by many other sellers.
This infinite elasticity is due to the large number of competing firms and the nature of the product being sold. Each seller offers a perfect substitute to the other one, leaving no room for price increases above the market price. Understanding this concept helps explain why in perfect competition, marginal revenue equals the price, as no surplus can be gained by setting prices above what the market dictates.