Question

Which of the following statement is correct?

• A. In perfect competition, MC cuts the MR and equal to AR
• B. In Monopoly, MC cuts the MR and greater than AR
• C. In perfect competition, MC cuts MR and $<$ AR
• D. In Monopoly, AR $<$ MR $<$ MC

Hint:

Under perfect competition, the relationship is always: $P = AR = MR$.
Therefore, at the equilibrium point where $MC = MR$, it is also true that $MC = AR$.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
Market structures are analyzed based on firm equilibrium, which is determined by comparing revenue and cost curves.
- Average Revenue (AR): Revenue earned per unit sold ($AR = \text{Price}$).
- Marginal Revenue (MR): Change in total revenue from selling an additional unit.
- Marginal Cost (MC): Change in total cost from producing an additional unit.
Under any market structure, a firm achieves equilibrium when:
1. $MC = MR$.
2. The MC curve cuts the MR curve from below.

Step 2: Detailed Explanation:
Let us analyze the relationships between these curves in different market structures:
1. In Perfect Competition:
A firm under perfect competition is a price taker, meaning it can sell any quantity at the prevailing market price.
Therefore, the price ($P$), Average Revenue ($AR$), and Marginal Revenue ($MR$) are all equal and constant, represented by a horizontal line:
\[ P = AR = MR \] At the point of equilibrium:
- Marginal Cost ($MC$) must equal Marginal Revenue ($MR$), meaning the MC curve cuts the MR curve.
- Since $AR = MR$ is a constant horizontal line, at this point of intersection, $MC$ must also be equal to $AR$:
\[ MC = MR = AR \] Therefore, the statement "In perfect competition, MC cuts the MR and equal to AR" is correct.
2. In Monopoly:
A monopolist faces a downward-sloping demand curve, where $AR$ lies above $MR$ ($AR > MR$).
At equilibrium ($MC = MR$), the MC is less than AR ($MC < AR$).
Therefore, options B, C, and D are incorrect.

Step 3: Final Answer:
In perfect competition, the firm's equilibrium condition is $MC = MR = AR$, meaning the MC curve cuts the MR curve at a point equal to AR.
Therefore, the correct option is (A).