Question

What is the relation between market price and marginal revenue of a price-taking firm?

Answer 1

Marginal revenue is defined as the change in the total revenue that occurs due to the sale of one more unit of output. It is calculated as

MR_n = TR_n − TR_{n − 1}

Where

MR_n = Marginal revenue due to n^th unit of output

TR_n = Total revenue due to n units of output

TR_{n − 1} = Total revenue due to (n − 1) units of output

Suppose that the market price is P

MR_n = TR_n − TR_{n − 1}

= PQ_n − P (Q_n − 1)

MR = PQ_n − PQ_n+ P

MR = P

Thus, for a perfect competitive firm, marginal revenue is equal to the market price per unit of output.