Question

Identify the incorrect option related to a perfectly competitive market:

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

• A. Statement 1
• B. Statement 2
• C. Statement 3
• D. Statement 4

Hint:

Remember:

• In perfect competition: \[ P = AR = MR \]
• Price line: \[ \text{Horizontal} \]
• Total Revenue curve: \[ \text{Upward sloping straight line} \]

Answer 1

The Correct Option is D

Concept: In a perfectly competitive market: \[ \text{Price} = \text{Average Revenue} = \text{Marginal Revenue} \] A firm is a price taker and sells its product at the market price.

Step 1: Examine Statement 1. Average Revenue: \[ AR = \frac{TR}{Q} \] Under perfect competition: \[ AR = \text{Price} \] Therefore: \[ \text{Statement 1 is correct.} \]

Step 2: Examine Statement 2. The price line shows the relationship between: \[ \text{Market Price and Output} \] In perfect competition, it is a horizontal line because price remains constant. Therefore: \[ \text{Statement 2 is correct.} \]

Step 3: Examine Statement 3. Marginal Revenue under perfect competition is: \[ MR = \text{Price} \] Therefore: \[ \text{Statement 3 is correct.} \]

Step 4: Examine Statement 4. Total Revenue: \[ TR = P \times Q \] As output increases, total revenue also increases. Hence, the total revenue curve is: \[ \text{an upward sloping straight line} \] and not a horizontal straight line. Therefore: \[ \text{Statement 4 is incorrect.} \] Thus, the incorrect option is: \[ \boxed{\text{Statement 4}} \]