Question

Draw the average revenue curve of a firm under (a) monopoly and (b) perfect competition. Explain the difference in these curves, if any.

Answer 1

Under perfect competition, the average revenue curve of a firm is parallel to the X-axis, whereas under monopoly it is negatively sloped. A perfectly competitive firm is a price taker and can sell as much as it wishes to at the prevailing price. Therefore, AR is equal to price and remains constant. AR curve is therefore parallel to the X-axis. A monopolistic firm is a price maker and can increase its sales only when the price of the good falls. Therefore, when price or AR falls, the firm can increase the quantity sold. Thus, under monopoly AR curves slopes downward.