Association of Chartered Certified Accountants (ACCA) Certification Practice Test

In the short run, how does the firm's Marginal Revenue (MR) curve compare to its Average Revenue (AR) curve?

1. It is higher than the AR curve

2. It is lower than the AR curve

3. It is the same as the AR curve

4. It is irrelevant to the AR curve

The correct answer is: It is the same as the AR curve

In the context of a perfectly competitive market, a firm's Marginal Revenue (MR) curve is indeed the same as its Average Revenue (AR) curve. This occurs because, in perfect competition, the price of the product is constant and equal to both the MR and AR. When a firm sells one additional unit of output, the increase in total revenue from selling that unit is equal to the price at which the product is sold, which also represents the average revenue received per unit. Since both MR and AR are calculated as total revenue divided by the quantity sold, under the conditions of perfect competition, they align perfectly, resulting in the MR curve coinciding with the AR curve. Therefore, this equality is a fundamental characteristic of competitive markets. In other market structures, such as monopolies, the relationship may differ, which is important to understand when considering how revenue behaves in different competitive landscapes. However, for the context of the question, where the focus is on the short-run dynamics typically associated with perfectly competitive firms, stating that the MR curve is the same as the AR curve is accurate.