Question

Briefly explain the reason for the shape of a marginal revenue curve for a perfectly competitive firm.

Short answer

Buyers are willing to purchase output at market price from a perfective competitive firm facing an inelastic demand curve.

Step-by-step solution

Definition

Marginal revenue refers to the addition of revenue to total revenue gained, from selling one more unit of output.

Explanation

A perfectly competitive firm faces an inelastic demand curve because buyers are willing to purchase output at market price. It implies that a firm's demand curve is the horizontal line at market price. A firm's marginal curve is same as demand curve because when a consumer demands one more unit of output, the firm will sell one more unit at market price and its revenue rises by exactly the same amount equal to the market price. It means that marginal revenue is equal to price.

The diagram given below shows the shape of the marginal revenue curve