Question

Price can be substituted for marginal revenue in the MR = MC rule when an industry is purely competitive because?

1) price is the same as average revenue.
2) price is constant regardless of the quantity demanded.
3) price minus cost equals marginal revenue.
4) price and marginal cost are the same in pure competition.

Answer 1

Price can be substituted for marginal revenue in the MR=MC rule in a purely competitive market because in such markets, price is equal to marginal revenue and it remains constant regardless of the quantity demanded, allowing firms to produce where P=MC.

Step-by-step explanation:

In a purely competitive industry, a firm will perceive the price of its product as given by the market, and this price does not change with the quantity of the product that the firm produces.

This means price is equal to marginal revenue (MR=P).

Therefore, we can use price to substitute for marginal revenue in the profit-maximization rule

MR = MC.

This is because a perfectly competitive firm's price is the same as average revenue, and it remains constant regardless of the quantity demanded.

Consequently, for a perfectly competitive firm, the recommendation to produce at the quantity of output where price equals marginal cost (P = MC) aligns with maximizing profit.