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) \(\$ 1\) b) \(\$ 10\) c) \(\$ 100\) d) more than \(\$ 1\), but less than \(\$ 10\) e) more than \(\$ 10\), but less than \(\$ 100\)

Short answer

In a perfectly competitive market, the marginal revenue for a firm equals the market price. In this problem, the firm sells 10 units of output at a price of \(\$ 10\) per unit, which is the market price. Therefore, the marginal revenue per unit is \(\$ 10\), and the correct answer is option b) \(\$ 10\).

Step-by-step solution

Understand the concept of Marginal Revenue in perfectly competitive markets

In a perfectly competitive market, the marginal revenue is the additional revenue that a firm earns by selling one more unit of a product. In a perfectly competitive market, marginal revenue equals the market price since the firm has no control over the price, and they sell their products at the prevailing market price.

Identify the market price in the given problem

The problem states that the firm sells 10 units of output at a price of \(\$ 10\) per unit. Therefore, the market price is \(\$ 10\) per unit.

Find the marginal revenue using the market price

As the marginal revenue equals the market price in a perfectly competitive market, the marginal revenue per unit in this case is also \(\$ 10\).

Select the correct option

Based on our analysis, we found that the marginal revenue per unit is \(\$ 10\). Therefore, the correct answer is option b) \(\$ 10\).

Key concepts

Perfectly Competitive Market

In the world of economics, a perfectly competitive market is a theoretical concept where several key conditions are met. These include many buyers and sellers, all selling a homogeneous product or service. None of the individual market participants can influence the market price by altering their own supply or demand. Instead, they are considered to be price takers. This means each seller accepts the market price as given and can only decide how many units to supply at that price.

In such markets, barriers to entry and exit are low, making it easy for new companies to start selling or for existing ones to leave the market. Product information is assumed to be perfectly symmetric, meaning all consumers and producers are fully informed about the prices and products available. Due to these conditions, a single firm’s output decision doesn’t affect market price, resulting in their marginal revenue—the income from selling one additional unit—being equal to the market price of that good. This is a crucial concept for understanding the exercise at hand.

Market Price

The term market price is used to describe the current price at which an asset or service can be bought or sold in a given market. In the context of a perfectly competitive market, the market price is determined through the interaction of supply and demand without any individual buyer’s or seller’s influence. When a firm operates in such a market, it sells its products at this market price and adjusts its output level based on the price to maximize profits.

In the exercise, the firm sells 10 units of output at a price of \(10 per unit, indicating that \)10 is the prevailing market price. This is the price consumers are willing to pay, and producers are willing to accept for each unit of the good. It’s an important figure in microeconomic analysis as it integrates the collective outcome of the economy's numerous transactions.

Microeconomics

Microeconomics is the branch of economics that focuses on the behavior of individuals and firms in making decisions regarding the allocation of limited resources. It deals with the analysis of small economic units, like the actions of individuals or companies, and the way those decisions affect the supply and demand for goods and services, which in turn determines prices. These price determinations lead to the resource allocation across various sectors of the economy.

Microeconomics plays a pivotal role in business decision-making where concepts like marginal revenue, costs, and profits are fundamental to determining the best strategies for maximizing profits or market share. As seen in the exercise, understanding the concept of marginal revenue in a particular market structure, like a perfectly competitive market, helps predict a firm’s potential earnings and informs its pricing strategies.