Final answer:
Marginal revenue curves are horizontal in perfect competition because firms are price takers, with marginal revenue equal to the market price, which doesn't change with the quantity produced. The MC curve, however, may slope downward initially then upward due to variable marginal returns. The intersection of MR with MC indicates profit-maximizing output level for a firm.
Step-by-step explanation:
The reason for the horizontal shape of the marginal revenue (MR) and marginal cost (MC) curves in a perfectly competitive market is due to the nature of the market structure itself. A perfectly competitive firm is a price taker, meaning it must accept the market price for its goods, with no control over setting the price. This results in the MR curve being a horizontal line at the market-determined price level, as each additional unit sold adds the same amount to total revenue. Therefore, a perfectly competitive firm’s MR is equal to the price of the good and is constant regardless of the quantity sold.
The MC curve, while not always horizontal, is relevant in determining the optimal quantity a firm should produce. The MC curve may initially slope downward due to increasing marginal returns at low levels of output but will eventually slope upward as diminishing marginal returns set in. Understanding the intersection of the MR and MC curves is critical for the firm in maximizing profit; this is where the firm will choose to produce since MR equals MC at this point.
Additionally, the relationship between the market demand and long-run average cost (LRAC) predicts competition levels in the market. A high market demand compared to the quantity at the minimum of the LRAC indicates a market with many competing firms, whereas a market demand near or below the minimum of the LRAC suggests fewer competitors or a monopoly.