Question

Identify the incorrect option related to a perfectly competitive market:

• A. A firm's average revenue is equal to the market price.
• B. The price line represents the relationship between market price and the firm's output level.
• C. Marginal revenue is equal to the market price.
• D. The firm's total revenue curve is a horizontal straight line.

Hint:

In perfect competition, remember: \[ AR = MR = P \] The price line is horizontal, but the total revenue curve is upward sloping because total revenue increases with output.

Answer 1

The Correct Option is D

Concept:
In a perfectly competitive market, a single firm is a price taker. This means that the firm cannot influence the market price by changing its own output. The price is fixed by the market forces of demand and supply. For a perfectly competitive firm: \[ AR = MR = P \] where, \[ AR = \text{Average Revenue} \] \[ MR = \text{Marginal Revenue} \] \[ P = \text{Price} \]

Step 1: Understanding average revenue.
Average revenue is calculated as: \[ AR = \frac{TR}{Q} \] In perfect competition, every unit of output is sold at the same fixed market price. So, \[ AR = P \] Therefore, option (A) is correct.

Step 2: Understanding marginal revenue.
Marginal revenue means the additional revenue earned by selling one more unit of output. Since the price remains constant in perfect competition, the revenue from each additional unit is also equal to the price. Therefore, \[ MR = P \] So, option (C) is correct.

Step 3: Understanding the price line.
The price line shows the relationship between price and output. In perfect competition, the price remains constant at all levels of output. Hence, the price line is a horizontal straight line parallel to the quantity axis. Therefore, option (B) is correct.

Step 4: Understanding total revenue curve.
Total revenue is calculated as: \[ TR = P \times Q \] Since price is constant, total revenue increases as output increases. So, the total revenue curve is an upward sloping straight line passing through the origin. It is not a horizontal straight line. Therefore, option (D) is incorrect. Hence, the incorrect statement is: \[ \boxed{\text{(D)}} \]