Question

Consider a perfectly competitive firm that sells all units of its output for the market price. The total revenue generated by the firm: i. increases initially, reaches a maximum, and then decreases as the quantity of output produced and sold increases ii. increases by a constant amount as the quantity of output produced and sold increases iii. appears graphically as an upward sloping straight line from the origin?

1) i. increases initially, reaches a maximum, and then decreases as the quantity of output produced and sold increases
2) ii. increases by a constant amount as the quantity of output produced and sold increases
3) iii. appears graphically as an upward sloping straight line from the origin

Answer 1

The total revenue for a perfectly competitive firm increases by a constant amount for each additional unit sold, appearing as an upward sloping straight line due to the firm's ability to sell unlimited quantities at the constant market price. The firm achieves maximum profit where total revenue and total cost differ the most.

Step-by-step explanation:

When considering a perfectly competitive firm, the total revenue generated by the firm increases by a constant amount as the quantity of output produced and sold increases. This is because a perfectly competitive firm faces a perfectly elastic demand for its product, meaning it can sell any number of units at the market price without affecting the price itself. The total revenue appears graphically as an upward sloping straight line from the origin, with the slope of this line equal to the price of the product. As such, the firm's total revenue continues to rise linearly as output increases. The highest profits or the smallest losses for the firm will occur where its total revenues exceed total costs by the greatest amount, which is also the point where marginal revenue equals marginal cost.